May 24, 2001


Mr. Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609

Re: Release Nos. IA-1862, 34-42620; File No. S7-10-00; Electronic Filing by Investment Advisers; Proposed Amendments to Form ADV

Dear Mr. Katz:

The Investment Counsel Association of America1 respectfully submits these supplemental comments regarding the Commission's proposed amendments to Form ADV, Part 2.2

In April 2000, the Commission announced the development of an electronic filing system for investment advisers, the Investment Adviser Registration Depository (IARD). The Commission also proposed substantial amendments to Form ADV, designed to modernize the registration process and enhance information that investment advisers provide to their existing and prospective clients. As part of this enhanced disclosure, a firm would be required to provide clients with a narrative brochure in plain English describing its practices, policies, and procedures, along with brochure supplements providing additional information regarding specific employees of the firm.

In September 2000, the Commission adopted rules amending Part 1 of Form ADV and requiring electronic filing of Form ADV on the IARD. At that time, the Commission deferred consideration of rules regarding the brochure and brochure supplements. SEC-registered investment advisers began filing Form ADV, Part 1 on the IARD in January 2001. We understand that the transition to electronic filing has gone very smoothly and we applaud the Division of Investment Management for its diligent work to accomplish this feat. The IARD will provide the Commission with a powerful tool to monitor advisers and gather useful data about the advisory profession. It also promises to deliver efficiencies for investment advisers by creating a centralized electronic filing system. Most important, the database will provide clients and potential clients around the world with easy access through the Internet to significant information about investment advisers, including disciplinary history.

Now that the IARD system and filing of newly revised Part 1 have been launched successfully, we take this opportunity to refocus some of our comments on proposed Part 2 of Form ADV. This letter supplements our previous comment letter.3 Part 2A

Proposed Part 2A would require all investment advisers to draft a firm brochure in a plain English, narrative format. We strongly support making advisory firm brochures more useful to clients. We continue to believe that a narrative brochure written in plain English that is not overly long or complex would significantly improve disclosure to clients and prospective clients.

In our previous comment letter, we expressed concern that the SEC's brochure proposal would require a detailed and lengthy discussion of firms' internal policies and procedures with respect to a variety of topics, including compensation of employees, financial industry activities and affiliations, personal trading, participation or interest in client transactions, brokerage, soft dollars, and proxy voting. After discussion with the staff of the Division of Investment Management, however, we understand that it was not the intent of the proposal to require detailed or lengthy descriptions of policies and procedures. Rather, we understand that the staff expects investment advisers to describe potential or actual conflicts of interest and very briefly summarize their policies and procedures for handling such conflicts. We further understand that the staff will clarify these points in the adopting release and may discuss helpful examples as well. The ICAA commends the staff for its intention to clarify the amount of disclosure it expects with respect to internal policies and procedures consistent with the goal of producing a user-friendly document for clients and prospective clients.

We also take this opportunity to reiterate our suggestions to further decrease the length and complexity of the brochure by eliminating:

We believe that these proposed disclosures would not provide material or meaningful information to clients. Narrowing the scope of the brochure would better focus client attention on the more important items to be evaluated, including disciplinary history, conflicts of interest, and investment style.

With these modifications, we believe the new brochure will provide clients with substantially better disclosure, both in form and in content, than the current Part II.

II. Part 2B

Proposed Part 2B would consist of a newly required "brochure supplement." The Commission proposed to require firms to provide each client with a supplement that describes the advisory personnel who (a) regularly communicate investment advice to that client or (b) formulate investment advice for that client (unless part of a team or committee) or (c) make discretionary investment decisions for that client's assets. The proposed supplement is intended to provide a client with useful information about the employees relevant to that client, rather than with general information about the executive officers of the firm.

The ICAA understands the intent and goals of the brochure supplement. We agree that clients should be able to assess the background of the investment advisory personnel who have substantial responsibility for the investment advice they receive. Depending on firm structure, these employees may be more important to individual clients than the directors and officers of the firm. Indeed, when hiring a professional in any field - including lawyers, accountants, and doctors - consumers often inquire about the individual's credentials and qualifications in addition to the reputation of the firm as a whole.

While recognizing the reasoning behind the supplement, the ICAA - and many other organizations - commented that the brochure supplement as structured in the proposal would be expensive, burdensome, and logistically difficult for mid- and large-sized firms. Tracking the drafting, delivery, and updating of the supplements on an individual client-employee basis would present particular hardships. The ICAA thus would appreciate an opportunity to work with the Commission staff to fashion a more feasible structure for the brochure supplement proposal. To that end, we proffer an alternative framework for Part 2B.4

The ICAA respectfully suggests that in lieu of the current proposal, the Commission should require advisory firms to deliver brochure supplements for employees who formulate advice or make investment decisions for retail clients to each such client. The supplements would be stickered promptly to report a disciplinary event and updated annually for any other changes. We discuss each aspect of this proposal below.

A. The brochure supplement requirement should apply only to employees who formulate advice or make investment decisions for clients.

We propose that the brochure supplement requirement apply only to those advisory employees who make discretionary decisions or substantially formulate advice regarding investments or investment strategy for clients. These employees are directly responsible for the advisory services for which the client contracted. A reasonable client would want to examine the background of the portfolio managers, investment counsel, and other individuals making investment decisions on his or her behalf, rather than phone representatives who merely relay advice or answer questions clarifying advice formulated by others.5 Our proposal is consistent with the Commission's view that the supplement is "designed to require information about persons who have substantial responsibility for the investment advice clients receive."6 Employees who simply communicate advice do not have that responsibility.7

Because investors are best served by receiving information about employees responsible for the investment advice they receive, we also recommend that the SEC require disclosure of relevant information even if a team or committee of portfolio managers substantially formulates advice for the client. Although the background of each individual is not as important in a committee or team context, clients may still be interested in the background of the team or at least key team members, such as an investment committee chairperson. Advisers should have the following options for providing team or committee information: (a) provide a supplement for each member of the committee; (b) provide a supplement for key committee members or selected team leaders; or (c) provide an aggregate description of the educational and professional qualifications of the team.8 Advisers should be permitted to include this aggregate team information in the Part 2A brochure instead of a supplement. The brochure could contain information about more than one committee if the information is presented in a format that reasonably would enable each client to recognize which committee formulates investment advice for the client.

An investment adviser's determination regarding preparation of brochure supplements should be based on a facts-and-circumstances analysis. To assist advisers in this analysis, the Commission should set forth specific factors to consider in determining whether a supervised person has substantial responsibility for formulating the advice a client receives. These factors could include: (a) whether a supervised person can decide on a discretionary basis to purchase or sell securities for the client's account; (b) whether a supervised person can determine or significantly alter a client's financial plan or asset allocation; (c) whether a supervised person can independently recommend that a client purchase or sell specific securities; (d) any internal limitations placed on the employee to provide advice; (e) the typical substance of the communications between the employee and the client; (f) what a reasonable client would expect the supervised person to be providing on his or her behalf; and (g) the job title and description of the supervised person's position.9 This system would ensure that clients and prospective clients receive information about the most relevant employees.

B. The brochure supplements should be delivered only to retail clients.

The ICAA respectfully suggests that brochure supplements be delivered to retail clients rather than sophisticated or institutional clients. Narrowing the range of clients to whom the brochure supplements must be delivered would make the requirements less costly while targeting the type of client most likely to benefit from receiving the information. Retail clients are more likely to lack the sophistication or initiative to affirmatively request specific information from investment advisers regarding advisory personnel. In addition, these clients are more likely to need plain English information describing who is formulating advice for them and how the process works.

Conversely, mandated disclosures about advisory personnel are not necessary for sophisticated clients, who generally request specific and extensive information from investment advisers regarding firm employees or categories of employees. Institutional and high net worth clients are generally sophisticated and experienced investors. Through the RFP process, due diligence meetings, and the assistance of consultants, these clients are able to obtain as much detailed information about an adviser that they feel is necessary, including information about the individuals who will be managing their assets. Sophisticated clients generally also have more readily available access to the decision-makers at investment advisory firms. These clients will continue to make specific requests for information.

Creating a dual standard for sophisticated clients and retail clients is consistent with other Commission rulemakings under the Advisers Act, such as the definition of "investment adviser representative" issued to implement the Coordination Act10 and the rules governing performance fees.11 In creating these dual standards, the Commission has recognized that "[b]ecause of their wealth, financial knowledge, and experience, the Commission has presumed that these [high net worth] individuals are less dependent on the protections" of the Advisers Act.

The ICAA strongly recommends that the Commission define retail clients as natural persons other than "qualified clients" as defined in Rule 205-3 under the Advisers Act. Thus, in general, retail clients would be natural persons who do not have a net worth of $1.5 million or $750,000 in assets under management with the adviser. The Rule 205-3 standard is very familiar to advisers, who apply it most frequently in the context of determining whether their employees are investment adviser representatives and in responding to questions in Form ADV, Part 1.

While we recognize that wealth is not a perfect proxy for sophistication, we know of no better workable alternatives. The SEC has relied upon somewhat arbitrary wealth-based dividing lines throughout the federal securities laws. These demarcations have served the industry, regulators, and investors well by streamlining regulation for firms, simplifying enforcement and compliance, and covering those investors most in need of protection.

C. The brochure supplements should be updated promptly to disclose disciplinary events and annually for all other items.

The Commission's proposal would require firms to amend or sticker brochure supplements whenever they become "materially inaccurate." We are concerned that the stickering requirement could prove extremely burdensome and costly for firms with large numbers of supplements. Accordingly, we propose that brochure supplements be amended promptly only to disclose any new disciplinary events that must be reported. Of the seven disclosure items proposed to be included in the supplement, disciplinary history is by far the most important to advisory clients.12 Requiring an annual "snapshot" of all other items in the brochure supplement will provide clients with appropriate information while reducing unnecessary administrative costs.

III. Part 2: Delivery Requirements

The Commission has proposed to require that advisers deliver a reprinted brochure or sticker to every client and prospective client each time the brochure is amended. Under the proposal, firms would also have to summarize separately the material changes in the brochure for clients and keep records of each summary and when it was delivered to clients. The proposal would also retain the current requirement of an annual offer.

The ICAA understands and supports the Commission's goal of preventing clients from relying on stale information. We continue to believe, however, that the Commission's proposals related to "stickering" and "summaries of material changes"13 will be overly burdensome for advisers. We strongly urge the Commission to require that advisers deliver an updated brochure to clients on an annual basis in lieu of the annual offer-with-continuous-stickering approach.14 This requirement could be conditioned on (1) inclusion in the brochure of prominent language disclosing that the brochure may be amended from time to time during the year, and that clients are advised periodically to check the IARD website for any changes; and (2) prompt delivery of a sticker or reprinted brochure where there has been a material change in disciplinary history.15

This approach will be administratively more feasible for advisers while improving the clarity of disclosure for clients.16


We commend the Commission for issuing this important proposal. With appropriate modifications, we are confident that the Commission's proposal will significantly enhance the level of relevant and useful information for investors. Please do not hesitate to contact us if we may provide additional information or clarification to the Commission or its staff regarding any of these matters.



General Counsel

Cc:The Honorable Laura Unger
The Honorable Isaac C. Hunt, Jr.
The Honorable Paul R. Carey
Paul F. Roye, Esq.
Robert E. Plaze, Esq.

1 The ICAA is a not-for-profit association that exclusively represents the interests of SEC-registered investment advisers. Founded in 1937, the Association's membership today consists of more than 275 investment advisory firms that collectively manage approximately $3 trillion for a wide variety of institutional and individual clients. For additional information, please consult our web site at
2 Electronic Filing by Investment Advisers; Proposed Amendments to Form ADV, Release Nos. IA-1862, 34-42620, April 5, 2000 ("Release").
3 Letter regarding Release Nos. IA-1862; 34-42620; File No. S7-10-00; Electronic Filing by Investment Advisers; Proposed Amendments to Form ADV, from Karen Barr, ICAA General Counsel, to Jonathan G. Katz, Secretary, Securities and Exchange Commission (June 13, 2000).
4 Within this alternate framework, we continue to suggest modification of the brochure supplement content to: (a) eliminate any requirement to discuss actions by entities that confer professional designations; (b) limit the disclosure of other business activities to material or investment-related employment; (c) eliminate the requirement to disclose the name of the individual's supervisor; and (d) eliminate the bankruptcy disclosure for individuals other than sole proprietors.
5 To use a medical analogy, a reasonable patient examines the credentials and competence of her surgeon, not the nurses who provide pre- and post-operative information about the surgery.
6 Release at 69.
7 Our proposed structure would be similar to the mutual fund context, in which the prospectus is required to include a discussion of the fund's portfolio managers but not the individuals who communicate with fund shareholders. See Form N-1A, Item 6 (a)(2) (requiring name, title, length of service, and past 5 years' business experience of portfolio managers primarily responsible for fund portfolio).
8 This proposal would prevent a situation in which clients receive no information about personnel responsible for formulating investment advice because they have contact only with client relationship employees and a team is solely responsible for formulating their advice.
9 Of course, some investment advisers may wish to accentuate the qualifications of their front-line personnel even if they do not have primary responsibility for formulating investment advice. Such advisers could always voluntarily deliver brochure supplements for persons that are merely communicating advice.
10 Rules Implementing Amendments to the Investment Advisers Act of 1940, Rel. No. IA-1633 (May 15, 1997).
11 Exemption to Allow Investment Advisers to Charge Fees Based Upon a Share of Capital Gains Upon or Capital Appreciation of a Client's Account, Rel. No. IA-1731 (July 15, 1998).
12 "The most important information in the supplements - the supervised person's disciplinary history - would be reported in the DRP Schedules in Part 1 of Form ADV and available through the IARD." Release at 68.
13 E.g., Release at 39, 129-130.
14 We understand that the vast majority of clients currently do not request the updated brochure pursuant to the annual offer.
15 Of course, as is currently required, an adviser must provide prospective clients with its most current brochure filed with the SEC. Our proposal addresses only delivery, not filing requirements.
16 See ICAA comment letter dated June 13, 2000 at 9-10.