Patrick H. Doyle, JD
Securities America Advisors, Inc.
Securities America, Inc.
7100 West Center Road, Suite 500
Omaha, NE 68106
June 12, 2000
Mr. Jonathan G. Katz
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Proposed Revisions to Form ADV and Related Rules
File No. S7-10-00
Dear Mr. Katz:
Thank you for the opportunity to comment on the Securities and Exchange Commission's (SEC) Proposed Rule: Electronic Filing by Investment Advisers; Proposed Amendments to Form ADV under Release No.-1862; 34-42620; File No. S7-10-00. In addition, although the SEC's comment period for Proposed Rule: Certain Broker-Dealers Deemed Not To Be Investment Advisers under Release Nos. 34-4209 and IA-1845 has been closed since January of 2000, we do not believe the analysis of either proposal can be properly completed unless they are analyzed in conjunction with each other. Therefore, we will also provide cross analysis comments on both proposed rules.
The comments within this letter are being made on behalf of Securities America Advisors, Inc. (SAA), an SEC registered investment adviser, and Securities America, Inc. (SAI), an SEC and NASD registered broker/dealer. SAA and SAI are affiliated companies. A number of SAI's registered representatives are also registered under their own independently registered SEC or state investment adviser firms. Our comments will also address some of their concerns.
We are generally in support of the SEC's and the North American Securities Administrators Association's (NASAA) efforts in implementing an online registration and licensing system, proposed revisions to the Form ADV, and related rules to make them more user and client friendly.
Although we are generally in support of the proposed revisions to the Form ADV and related rules, we do ask that the SEC reconsider some of the provisions with the goal of providing greater flexibility, clarity, and guidance to advisers. We want the proposed changes to achieve their intended purpose without placing undue burdens on advisers, while providing information that is useful to clients.
I. New Registration System
The Investment Adviser Registration Depository ("IARD"), the electronic filing system which is under development by the NASD Regulation, Inc. (NASDR) on behalf of the SEC, NASAA, and various states should modernize and improve both the filing procedures and client access to information. The IARD is modeled after and will interact with the NASDR's broker/dealer Central Registration Depository system (CRD).
The IARD should ultimately be of great benefit to the investment adviser industry and general public once it is fully implemented. However, we have concerns regarding the implementation time period for the new IARD system and corresponding rules. It is our understanding that once currently registered advisers are required to file their registrations online through the IARD they are also required to fully implement the use of the revised Form ADV, disclosure brochures, and brochure supplements. We believe that such an implementation time period is not realistic considering the monumental nature of the proposed regulatory revisions that are being undertaken. As an alternative, we request that once currently registered advisers are required to file their registrations online through the IARD, they should be given a 90 day time period to fully implement the use of the revised Form ADV, disclosure brochures and brochure supplements. This is a concern that SEC, NASAA, and various state regulators should all consider. We respectfully request that the various regulators involved in the implementation of the IARD system provide the industry with timely information and training on use of the system and corresponding rules.
II. Proposed Form ADV Revisions
The proposed revisions will substantially change the Form ADV and are based on providing clients with complete and direct plain language disclosures regarding the adviser's services.
A. Form ADV Part 1
The proposed Form ADV Part 1 will provide general information about the adviser's structure, its regulatory information, its affiliates, and its associated persons.
1. Form ADV Part 1A
We believe the proposed Form ADV Part 1A requirements, which are similar to the current Form ADV Part I requirements regarding the firm and advisory affiliates are generally acceptable in the currently proposed format outside of our comments regarding the filing of disciplinary information referenced below.
a. Item 11. Disciplinary Information
We are in support of the SEC's efforts regarding the filing of the adviser's and affiliated persons' disciplinary information to follow the broker/dealer Form BD CRD filing requirements. The new filing system will allow for consistency of information that can be electronically copied and linked to the IARD in replacement of the current Schedules E and D. We are also in support of limiting the filing of disciplinary information to the last 10 years.
However, we are concerned about the inconsistency of the disciplinary filing and disclosure requirements between Form ADV Part 1A Item 11, and Form ADV Part 2. This inconsistency may create confusion and result in inadvertent disclosure violations. We believe consistency throughout the Form ADV will assist both the public's understanding of the disclosure and the adviser's ability to properly complete the Form ADV. In order to promote such consistency, we ask the SEC, NASAA, and various states to have the same standards for materiality in Form ADV Part 1A, Item 11 as in Form ADV Part 2A, Item 8 and Form ADV Part 2B, Item 3.
In addition, we request that the disciplinary information of the adviser's affiliated firms and entities should not be required to be automatically restated in detail on the adviser's IARD filing. Instead, we request that a general IARD reference should be allowed under Item 11 noting the affiliate's CRD and/or IARD number, and web site address, unless the affiliate's disciplinary disclosures would have a material impact on the adviser's ability to provide advisory services, then a detailed disclosure should be required.
2. Form ADV Part 1B
We support the NASAA's and state regulators' efforts in developing the Form ADV Part 1B within the proposed Form ADV for use by state registered advisers under the IARD system. However, state registered advisers are in need of a significant amount of guidance from the NASAA and states regulators regarding the implementation of the new system. We respectfully request that the NASAA and state regulators provide the industry with timely information and training on use of the use of the Form ADV Part 1B and corresponding rules.
B. Form ADV Part 2
We support the proposed Form ADV Part 2 as a replacement for the current Form ADV Part II and Schedule F as the adviser's disclosure brochure. We agree with the SEC's conclusion that the check-the-box format currently used in Form ADV Part II does not lend itself to meaningful, clear disclosure. We are supportive of the SEC's initiative to adopt a narrative format written in plain English. However, we believe there are issues regarding the brochure and brochure supplement disclosure and delivery requirements that should receive further consideration.
1. Form ADV Part 2A: The Firm Brochure
We are generally in support of the SEC's proposals relating to the disclosure statement, the "firm brochure" that the adviser must provide to clients at the start of the advisory relationship and offer to its clients annually. We believe that generally basing the new disclosure brochure requirements on the current Schedule H disclosure brochure format for wrap fee programs will be in the best interests of the users, clients, and public. SAA is currently following the Schedule H disclosure brochure requirements for its wrap fee programs. We have found that the Schedule H disclosure brochure format is more useful in providing material information to our users and clients than the Form ADV Part II and Schedule F format. SAA anticipates no problems in implementing the proposed firm disclosure brochure format for all of our adviser firm programs. SAA is considering the implementation of specific brochures for each of our advisory programs or program groupings. We have found that providing clients with the specific material disclosure information that impacts them is a better disclosure format and allows clients to focus their analysis on the advisory program(s) that affect them. We are also in support of the SEC's proposal to remove the requirement of disclosing information on the senior management of an advisory firm in the firm disclosure brochure. This information is not generally material to clients in their decisions regarding the use of an adviser. This position is especially true in the case of larger nationally based adviser firms. A client's best interest is served by providing them material information on the persons they will be directly dealing with and/or persons managing their assets. As proposed, we support most of the cover page items. However, at a large firm, rather than including the name of an individual, we recommend including the department that can be contacted for further information.
a. Item 8. Disciplinary Information
The proposed brochure must disclose the legal and disciplinary event history of the adviser and its management personnel for the last 10 years. There is an Item 8 legal and disciplinary disclosure event list. This disclosure is not presently required under the current Form ADV Part II and Disclosure Brochure format. As previously stated in our Form ADV Part 1, Item 11 comments, we believe consistency throughout the Form ADV will assist both the public's understanding of the disclosure and the advisory firm's ability to properly complete the Form ADV. In order to promote such consistency, we ask the SEC, NASAA and various states to have the same standards for materiality in Form ADV Part 2A, Item 8 as in Form ADV Part 1A, Item 11 and Form ADV Part 2B, Item 3.
The SEC is asking whether disciplinary disclosure information should be included in a separate document accompanying the brochure? Although we believe that clients should be provided with material disciplinary information, we do not believe that such an approach is appropriate. Clients should be provided with disclosure information in a format presentation that is balanced and objective. If an adviser's disciplinary information is such that it should be highlighted over all other information, we question why they would even be allowed to be registered as an adviser.
The NASAA and various states are also proposing that state registered advisory firms should be required to disclose arbitration liability claims (not just awards) that are in excess of $2500 within the last 10 years. The SEC is also asking whether it should make a similar requirement for SEC registered advisers. We believe that arbitration claims should not be required to be disclosed as a stand-alone item. An arbitration action should only be disclosed if it involves a final decision and award. We also question whether the amount should be higher than $2500. It is difficult to conceive of a situation where an individual would bring an arbitration action in a matter involving the material integrity of an advisory firm or affiliated person for less then $2500, let alone receive an award of less than $2500. We recommend that if there is to be an arbitration disclosure requirement for advisers the requirement should be set at a minimum arbitration award of over $20,000.
b. Brochure Delivery Requirements
We ask that the regulators provide greater flexibility in the "roll out" phase of the IARD and in the update proposal. Turning first to the roll out proposal, we agree that new adviser clients should in fact receive the new firm brochure. However, in our view, requiring advisers to actually deliver new brochures and brochure supplements to all existing adviser clients following a 30 day transition period is costly and unwarranted, absent a material change. Currently under 204-3(c)(1) and (4), we are required to make an annual offer to clients. If a client accepts the offer, we deliver our current brochure that complies with the requirements found in Form ADV Part II. SAA's annual offer is currently sent via U.S. mail. Only a small percentage of clients ask for delivery of the brochure. In contrast, sending the revised brochure and supplements to our existing client base will create a certain amount of client confusion with potentially very little material benefit to the public. If the most significant change to a firm's brochure is format, mandating delivery to all clients is excessive. Instead, an annual offer announcing the changes should suffice. However, if this is not acceptable we request that the brochure and brochure supplement client delivery transition period be extended from 30 days to 90 days.
One of the major proposed changes is that advisory firms will be required to deliver their disclosure brochure whenever there is a material change to the disclosure brochure in addition to making their annual disclosure brochure offer to clients. We support the concept of providing notice of material changes to clients. We urge that the regulators provide more flexibility relating to a good faith assessment of what is material, and the manner in which clients are notified. We seek clarification as to what is material if the SEC determines that items such as "changes in operations, its fees, key advisory personnel, and other information provided in the firm brochure" are indeed material, regardless of the type of adviser, the type of clients and the type of services provided. We recommend that guidance for the materiality standard continue to be based on Rule 206(4)-4. The focus of the disclosure in Rule 206(4)-4 is whether the adviser's integrity or ability to meet contractual obligations is threatened. This will vary depending on the size of the firm, the number of personnel, and the type of services provided.
The SEC asked for comments on whether clients would be confused if advisers were required to reprint their brochures only every two or three years, rather than every year? No. If the brochure becomes confusing it is in the adviser's best interest, as well as the client's, to reprint at that point. As a general rule, SAA issues a new brochure annually. In several years, we have issued two brochures. The key to the brochure is to allow the adviser to make the judgement based on their specific business activities and clients.
At a minimum, we request that the regulators reconsider the requirement of delivering an adviser firm disclosure brochure to clients every time there is a material change to the information in the brochure. Instead, we request that advisers be allowed to meet their delivery requirements in the following manner:
If this minimum delivery and notice requirement is not acceptable to the regulators we then request that the mailing include a statement explaining the material change in the brochure. This statement should be the same statement that is proposed to be required in the adviser's disclosure brochure Item 2, "Material Changes".
2. Form ADV Part 2B: The Brochure Supplement
A brochure supplement for each supervised person who regularly communicates with clients and formulates investment advice for clients is one of the proposed new requirements. The brochure supplements will not be filed with regulators, but will be kept on file with the adviser. However, licensing and disciplinary information must be filed on the IARD. Each supplement will contain background information about the individual.
a. Item 3. Disciplinary Information
The supervised person's disciplinary information disclosure requirement will generally follow the same disclosure brochure requirements of the adviser firm. In addition, state registered adviser firm supervised persons will also have to disclose arbitration actions brought against them for more than $2500 within the last 10 years. As previously stated in our adviser firm disciplinary comments, we ask the SEC, NASAA, and various states to have the same standards for materiality in Form ADV Part 2B, Item 3 as in Form ADV Part 1A, Item 11 and Form ADV Part 2A, Item 8.
b. Brochure Supplement Delivery Requirements
The regulators are now proposing that anytime there is a material change in a supervised person's disciplinary information, a revised brochure supplement must be provided to their clients. If the SEC is going to require the delivery of a brochure supplement of a supervised person to clients every time there is a material change to the information in the brochure, we recommend that clients of all financial services companies receive disclosure that is meaningful whenever they receive fee based investment advice. The SEC should require this type of disclosure from broker/dealer registered representatives, advisory firm supervised persons, and any other persons that render fee based investment advice. It is good public policy for clients to receive meaningful disclosure from all financial services personnel with whom they have ongoing fee based relationships. The investing public does not generally understand the distinction between broker/dealers and registered representatives and registered investment advisers and investment adviser representatives.
III. Cross Analysis between the Proposed Investment Adviser Rule Changes and the SEC's Proposed Rule regarding Certain Broker/Dealers Deemed Not To Be Investment Advisers
Whether the public is receiving full and fair disclosure from financial services personnel is an especially critical issue in light of the SEC's Proposed Rule: Certain Broker-Dealers Deemed Not To Be Investment Advisers, Release Nos. 34-4209 and IA-1845. Under this proposed rule, a broker/dealer providing investment advice to clients, regardless of form of compensation, would be excluded from the definition of investment adviser as long as (i) the advice is provided on a non-discretionary basis; (ii) the advice is solely incidental to the brokerage services; and (iii) the broker/dealer prominently discloses to its customers that their accounts are brokerage accounts. This rule allows individuals to provide essentially the same services to clients, yet imposes a disclosure obligation on only one sector of the industry.
If these two proposed rules are implemented as currently proposed, the securities industry would potentially favor those individuals and entities that structure their business to be broker/dealer in nature, regardless of their disciplinary history or level of competence. The following is a list of issues and conflicts under SEC's Proposed Rule: Certain Broker/Dealers Deemed Not To Be Investment Advisers, that will create a potentially confusing environment for the investing public:
The investing public does not generally understand the subtle distinctions between broker/dealers and investment advisory firms or registered representatives and investment advisor representatives. They want their securities industry professionals to treat them fairly and competently. If a client has a complaint against their securities industry professional, are they going to care whether that person is in a fiduciary relationship with them? If their relationship with their securities industry professional is not classified as a fiduciary relationship, is their complaint going to have less merit? Granted, there is an argument that any action taken by regulators to discourage brokerage churning violations by broker/dealers should be approved. However, using an adviser fiduciary service element to resolve a broker/dealer non-fiduciary abuse does not appear to be the best solution in protecting the public. The better and proper solution to is require all representatives that want to have fee based brokerage accounts be to properly licensed under advisers, or at a minimum, have the same disclosure requirements. Why create an environment where there is an incentive for securities industry professionals to reach a lower standard of professional conduct when dealing with their clients?
The combined effect of the two proposed rules and how they are ultimately implemented is going to have a significant impact on how the securities industry does business. Many of the recommendations under the proposed investment adviser rule revisions are positive and will be of great benefit to the industry and public. Regardless of the benefit, there is going to be a great deal of front-end work, confusion, and transitionary stress in the industry during the implementation phases under the new rules.
We strongly support the development and implementation of the IARD and generally support the proposed revisions to the Form ADV and rules. However, we have a number of concerns that are stated above, that primarily focus on the disciplinary filing and disclosure requirements, brochure and brochure supplement delivery requirements, and conflicts between the proposed investment adviser rules and proposed broker/dealer exception to being deemed an investment adviser rule.
In conclusion, we applaud the SEC for their efforts in putting forth the proposed investment adviser rule revisions. We appreciate the opportunity to comment on the proposals and hope the SEC finds our comments helpful. In addition, we respectfully request that a copy of this letter be forwarded to the NASAA for their consideration. If you have any questions or concerning regarding our comments, please contact the undersigned at 402-399-9111, extension 2394 or e-mail the undersigned at email@example.com.
SECURITIES AMERICA ADVISORS, INC.
SECURITES AMERICA, INC.
Patrick H. Doyle, JD
Securities America Advisors, Inc. Compliance Officer