MARIANNE K. SMYTHE
DIRECT LINE (202) 663-6711
June 13, 2000
Jonathan G. Katz, Secretary
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
RE: File No. S7-10-00
Proposed Amendments to Form ADV
Dear Mr. Katz:
We are writing in response to your request for comments on the Securities and Exchange Commission's ("SEC" or "Commission") release proposing revisions to Form ADV. These proposals anticipate the inauguration of an electronic filing system for investment advisers, the Investment Adviser Registration Depository ("IARD").1 On the whole, these proposals are forward looking and imaginative. They clearly represent the culmination of a commendable effort by the Commission and its staff to create a modern, simplified registration process for investment advisers. As good as these proposals are, however, they fall short in a few critical respects. If adopted in their present form, certain of these proposals will:
The Commission's proposal would require a supplement to the brochure for investment adviser employees who are "supervised persons" of the investment adviser. Generally, these are employees who have a direct involvement with clients because they either communicate with or formulate investment advice for clients, or make discretionary investment decisions for client assets. The investment adviser would be required to provide a paper brochure supplement to a client no later than the time the supervised person begins providing advisory services to the client.
There is a certain incongruity and anomaly in the proscribing of a requirement to deliver a paper document in a Commission release that in so many other ways acknowledges and welcomes the Internet age. If the proposal were simply anomalous, it would not provoke comment. But it is also very burdensome to advisers with a large and dispersed network of investment adviser representatives. And it adds little to the public record for advisers whose representatives are also registered representatives of an affiliated broker-dealer. For these representatives, Form U-4 requires much of the same information. In addition, Item 11 of Part IA of Form ADV requires disclosure of detailed disciplinary information and this information will be available to the public once filed through IARD. The SEC should therefore, at a minimum, exempt from the supplementary brochure requirement, supervised persons who are dually registered as broker-dealers with the NASD and whose registered representatives have filed Form U-4s with the NASD's CRD. The SEC could require that investment advisers who are exempted from the supplementary brochure requirement include in the firm brochure a statement that the consumer can view qualifications, past employment history and disciplinary history of its investment adviser representatives through the NASD's Public Disclosure Program.
Social Security Numbers
The SEC proposes that control persons and a few others place their social security numbers and dates of birth in the non-public part of the Form ADV. We think this is a mistaken idea for which there is no compelling reason. To require this disclosure is to put these people at risk that this highly sensitive information will be misappropriated. We have seen that systems, even those supposedly highly secure, are susceptible to hacking. The stated reason for requiring disclosure is to avoid confusion over persons who share the same name. The SEC's concern about that issue perhaps could be addressed by requiring that each covered person be assigned a CRD number. Many dual registrants already have such numbers.
Disclosure of Disciplinary History
The SEC's has taken a welcome step to simplify disclosure of disciplinary information by permitting investment advisers that are also registered broker-dealers to electronically link certain disciplinary disclosure already made on the NASD's Web Central Registration Depository ("Web CRD") to the Form ADV. The proposals have certain features, however, that are not welcome.
1. Disclosure of Ex Parte Actions
Most disturbingly, the SEC proposes to require disclosure of certain felony criminal indictments and informations, and misdemeanor informations, in other words, ex parte unadjudicated charges made by prosecutors. This proposal represents an unfortunate and unwise further evisceration of the principles of presumed innocence and due process that gained a foothold in the equally reprehensible disclosure requirements in Form BD and Form U-4. The SEC should eliminate this proposal and get rid of the similar requirements on Form BD.
2. Form BD Parallelism
The SEC has recognized the benefits of permitting electronic linkage between Form BD and Form ADV. Form BD requires extensive disclosure of disciplinary information and this information could be linked electronically to Form ADV. It seems counterproductive in the extreme, therefore, for the benefits of this linkage to be confounded and thwarted by tinkering with the disclosure requirements of disciplinary events for investment advisers so that they do not match up with the requirements for registered broker-dealers. The SEC should recognize the benefits of efficiency and clarity of allowing dually registered firms to rely on the disclosures made in Form BD.
3. The Scarlet Orders
The proposal that investment advisers who are subject to a Commission administrative order, must, for one year following the date of the order, give a copy of that order to prospective and current clients would add little to existing disclosures -- the information will be available on-line. But the requirement will complicate the resolution of administrative proceedings. One of the issues often negotiated in settling these proceedings is whether this information should be sent to clients. If this issue is removed from discussion, advisers, who may already feel unjustly accused, will resist settling the case and having the administrative order draped around their figurative necks for the coming year.
4. Arbitration Results
The SEC has posed the question about disclosure of arbitration decisions in a way that suggests that disclosure is a foregone conclusion, and the only issue is whether the disclosure should be of the claim or of the award. Further, the SEC posits a threshold amount for triggering disclosure of $2500. We think that all disclosure of arbitrations is inappropriate. The adviser who "loses" an arbitration is not found liable of wrongdoing just because it is required to pay an award. Of course, if the Commission persists, it should require disclosure of awards, not claims, and it should increase the threshold to a much larger number than $2500. A minimum of ten times that amount would be more reasonable. And only awards involving "investment-related statutes" should be included.
Amendments to the Brochure
The Commission is proposing to require that the adviser give existing clients written brochure updates whenever there is a material change to the information in the current brochure and that these updates be included in the brochure delivered to prospective clients. These updates could either be incorporated into the text of the brochure or "stickered." We believe this proposal will create substantial and unnecessary burdens on advisers. The Form ADV is not a prospectus. Consumers are receiving a service. Nonetheless, if the Commission believes that an evergreen Form ADV is imperative to the protection of investors, it should recognize the utility of the Internet to meet this concern and allow for updating requirements to be satisfied by the adviser posting the updates on its web site. That solution would also resolve the questions concerning stickers: "How many? How often?" Preoccupation with the cumbersome and antiquated rituals of "stickering" seem particularly out of place in so forward looking a release as this one.
The SEC has asked how soon after the adoption of the proposals would investment advisers be ready to submit their Form ADVs through the IARD. March 31, 2001, or six months from the date of approval, whichever is longer, is the minimum amount of time necessary to prepare for the new filing requirements and procedures. March 31 coincides with the annual filing of the Form ADV and a majority of the investment advisers registered with the SEC customarily reprint at that time.
* * *
We thank you for this opportunity to comment on your proposals.
Marianne K. Smythe
Cc: SEC Commissioners
The Honorable Chairman Arthur Levitt
Commissioner Paul R. Carey
Commissioner Isaac C. Hunt, Jr.
Commissioner Laura S. Unger
1 The proposed changes were published in Investment Advisers Act Release No. 1862 (Apr. 5, 2000), 65 FR 20524 (Apr. 17, 2000).