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Updated as of March 18, 2011 Staff Responses to Questions About Part 2 of Form ADVThe staff of the Division of Investment Management has prepared the following responses to questions about Part 2 of Form ADV, under the Investment Advisers Act of 1940 and expects to update from time to time our responses to additional questions. These responses represent the views of the staff of the Division of Investment Management. They are not a rule, regulation, or statement of the Securities and Exchange Commission, and the Commission has neither approved nor disapproved this information. The adopting release for the most recent Amendments to Form ADV (dated July 28, 2010, the “Adopting Release”) can be found at: http://www.sec.gov/rules/final/2010/ia-3060.pdf. Compliance DatesQuestion I. 1Q: The Commission has extended the compliance dates for certain advisers to deliver Part 2B, the brochure supplement. What are the new compliance dates? A: On December 28, 2010, the Commission extended the compliance dates for delivery of Part 2B for certain investment advisers. (See IA-3129 at http://www.sec.gov/rules/final/2010/ia-3129.pdf)
Question I. 2Q: Has the Commission also extended the compliance dates for filing and delivering Part 2A, the brochure (“new brochure”)? A: No. The compliance dates for delivering new brochures remain unchanged for both newly registered advisers and existing advisers.
Preparing BrochuresQuestion II. 1Q: Is there a template or fillable form available on the IARD system or SEC website that my advisory firm may use to prepare a brochure meeting the requirements of Form ADV, Part 2A? A: No. Advisers must prepare their own brochures in accordance with the instructions and items under Part 2A. The IARD system permits each adviser to use its own word processing program to prepare its brochure, which must be converted to a text searchable PDF file and submitted in accordance with IARD system instructions. http://www.sec.gov/divisions/investment/iard/iardfaq.shtml#additional (Posted March 18, 2011) Question II. 2Q: Item 2 of Part 2A, Material Changes, requires a brochure filed as part of an annual updating amendment to identify and discuss material changes to the brochure from the last annual update. Does an adviser transitioning to the new brochure (Part 2A) have to discuss material changes from its “old” brochure (Part II)? A: No. An adviser may choose not to identify and discuss material changes when it is filing a brochure in connection with the transition to the new Part 2A. Item 2 of Part 2A is designed to identify any material changes from one year to the next of the new narrative brochure. However, if the new narrative brochure contains material information, such as a new conflict of interest or new disciplinary information, that is being provided to clients for the first time, an adviser may want to highlight the new information for clients. (Posted March 18, 2011) Question II. 3Q: Instruction 1 of the General Instructions for Part 2 of Form ADV requires that an adviser respond to each item in Part 2 in the same order with the same heading as they appear in Part 2. Does this mean an adviser must respond to each sub-part of an item in the same order and include the same headings for each sub-part where provided? A: No. The instruction only requires an adviser to include the heading for each item and to provide responses in the same order as the items appear in Part 2. As a result, an adviser’s brochure does not have to include headings of sub-parts or follow the order of sub-parts within each item in Part 2. In addition, the cover page need not identify it as Item 1, Cover Page. (Posted March 18, 2011) Question II. 4Q: Item 8.B of Part 2A requires an adviser to explain the material risks for each significant investment strategy or method of analysis the adviser uses. Does Item 8.B require an adviser that uses pooled investment vehicles as a significant investment strategy or method of analysis to duplicate the risk disclosures contained in a prospectus or other offering document for the pooled investment vehicle? A: An adviser may satisfy the requirement of Item 8.B by providing a brief explanation of the material risks for each strategy and referring clients to the prospectus, offering memoranda, or other documents that a client participating in the pool will or has received that set out a more detailed discussion of risks. (Posted March 18, 2011) Question II. 5Q: Item 8.B of Part 2A requires an adviser to explain the material risks for each significant investment strategy or method of analysis the adviser uses. Does Item 8.B require an adviser that uses multiple investment strategies or methods of analysis to explain the material risks for each significant investment strategy or method of analysis in the brochure? A: Yes, an investment adviser using multiple significant investment strategies or methods of analysis must explain the risks for each significant investment strategy or method of analysis it uses. An adviser using multiple strategies or methods of analysis may satisfy the requirements of Item 8.B by summarizing the strategies and methods and their material risks and referring clients and prospective clients to a separate disclosure document that the client has or will receive that sets out a more detailed explanation of the material risks of investment strategies or methods of analysis that are or will be used to manage the client’s account. (Posted March 18, 2011) Question II. 6Q: The staff has previously stated its view that an offshore adviser to an offshore private fund does not have an obligation to deliver a brochure under rule 204-3 to the offshore fund or to any investors in an offshore private fund it advises. ABA Subcommittee on Private Investment Entities, SEC Staff Letter (Aug. 10, 2006). The note to rule 203-1 states that an adviser that does not have to deliver a brochure to any clients does not have to prepare or file a brochure with the Commission. Does the 2006 staff response and the note work together such that an offshore adviser whose only clients are offshore funds would not have to prepare or file a brochure as part of its Form ADV? A: Yes. (Posted March 18, 2011) Filing and Delivering BrochuresQuestion III. 1Q: Rule 204-3(c)(i) excepts an adviser from the requirement of delivering brochures and brochure supplements to clients that are registered investment companies and business development companies. Does an adviser that chooses to prepare and deliver a brochure to such a client have to file the brochure on the IARD system? A: No. Under rule 203-1, an adviser is not required to file a brochure with the Commission if it is not required to deliver a brochure. (Posted March 18, 2011) Question III. 2Q: Rule 204-3 requires an adviser to deliver a brochure and one or more brochure supplements to each client or prospective client. Does rule 204-3 require an adviser to a hedge or other private fund to deliver a brochure and supplement(s) to investors in the private fund? A: Rule 204-3 requires only that brochures be delivered to “clients.” A federal court has stated that a “client” of an investment adviser managing a hedge fund is the hedge fund itself, not an investor in the hedge fund. (Goldstein v. Securities and Exchange Commission, 451 F.3d 873 (D.C. Cir. 2006)). An adviser could meet its delivery obligation to a hedge fund client by delivering its brochure to a legal representative of the fund, such as the fund’s general partner, manager or person serving in a similar capacity. (Posted March 18, 2011) Question III. 3Q: Must an adviser to a hedge fund or other private fund file as part of its Form ADV the brochure it is required to deliver to the hedge fund or other private fund? A: Yes. (Posted March 18, 2011) Covered Persons for Brochure SupplementsQuestion IV. 1Q: Rule 204-3(b)(3) requires an adviser to deliver to each client or prospective client a brochure supplement for a supervised person before or at the time that supervised person begins to provide advisory services to the client. For purposes of that rule, a supervised person will provide advisory services to a client if the supervised person will formulate advice and have direct client contact or make discretionary investment decisions for the client regardless of client contact. If an adviser designates a supervised person to provide advisory services to a client on a temporary basis, such as when the primary supervised person is on medical leave or a vacation, does rule 204-3(b)(3) require delivery of a brochure supplement for the supervised person providing advisory services on a temporary basis? A: The Division would not recommend enforcement action to the Commission under rule 204-3 if an adviser does not deliver a brochure supplement for one or more of its supervised persons who provides advisory services to a client on a temporary basis for a period not to exceed 30 days. (Posted March 18, 2011) Question IV. 2Q: Rule 204-3(b)(3) requires an adviser to deliver to each client or prospective client a brochure supplement for a supervised person before or at the time that supervised person begins to provide advisory services to the client. If a supervised person begins to provide advisory services to a client as a result of another supervised person’s resignation or termination, does rule 204-3(b)(3) require delivery of the new supervised person’s brochure supplement before or at the time he or she begins to provide advisory services to the client? A: The Division would not recommend enforcement action to the Commission under rule 204-3 if an adviser, under such circumstances delivers the brochure supplement within 30 days after the supervised person begins to provide advisory services to the client, as long as the adviser has notified the client that the supervised person previously providing advisory services to the client will no longer do so. (Posted March 18, 2011) Question IV. 3Q: In some cases a supervised person’s role may be limited to entering client information into a computer program that produces an asset allocation or list of recommended securities for the client, which the supervised person cannot alter. Does the supervised person "formulate" investment advice for purposes of brochure supplement delivery requirements and must a brochure supplement be prepared for such supervised person? A: We would not view engaging in such limited activities on behalf of a client as formulating investment advice. Under these circumstances, we believe that the adviser does, however, have an obligation to disclose to its clients the respective roles of the computer program and supervised person. (Posted March 18, 2011) Question IV. 4Q: If a supervised person assists a client in choosing among several investment advisers or mutual funds that are identified by a computer program or are produced as a result of the completion of an investment questionnaire, and the supervised person cannot suggest advisers or funds not included in the list provided by the computer program or generated using an investment questionnaire, is the supervised person "formulating" investment advice for purposes of the brochure supplement delivery requirements under rule 204-3? A: Yes. In our view providing advice about the selection and retention of other advisers or advice about the selection of securities recommended by the computer program or investment questionnaire is “formulating” investment advice, and an adviser would be required to deliver a brochure supplement for that supervised person. (See Applicability of the Investment Advisers Act to Financial Planners, Pensions Consultants, and Other Persons Who Provide Investment Advisory Services as a Component of Other Financial Services, Investment Advisers Act Release No. 1092 (Oct. 8, 1987)). (Posted March 18, 2011) Question IV. 5Q: If an investment adviser has discretion over a client’s account, and all of the advice is formulated by a team of supervised persons who do not have client contact, for which supervised persons must the adviser deliver a brochure supplement under rule 204-3? A: The note to Instruction 1 to Part 2B explains that an adviser does not have to deliver a supplement for a supervised person who has no direct client contact and has discretionary authority over a client’s assets only as part of a team. However, if the client routinely interacts with a supervised person or group of supervised persons for which a supplement is not required to be delivered, the adviser should consider disclosing to clients that these supervised person(s) are not permitted by the firm to formulate any advice for the client. (Posted March 18, 2011) Question IV. 6Q: If investment advice is provided by a team comprised of more than five supervised persons who may have client contact, rule 204-3(b)(3) permits an adviser to deliver brochure supplements for the five supervised persons with the most significant responsibility for the day to day advice provided to a client. Does an investment adviser have to have discretionary authority over client assets to rely on this team delivery exception in rule 204-3(b)(3)? A: No, if non-discretionary investment advice is provided by a team of more than five supervised persons who may have client contact, an adviser may deliver brochure supplements for the five supervised persons with the most significant responsibility as provided for in rule 204-3(b)(3). (Posted March 18, 2011) Question IV. 7Q: If an adviser provides non-discretionary advice to a client that is formulated by a team of more than five supervised persons, one of whom selects or recommends advisory programs for the client and routinely meets with or has other client contact, for which supervised persons would an adviser have to deliver a brochure supplement? A: Rule 204-3(b)(3) permits an adviser to deliver supplements for the five supervised persons on a team with the most significant responsibility for the day to day advice provided to a client. The staff would view the supervised person that has primary client contact and who is selecting or recommending advisory programs for a client as one of the five supervised persons with the most significant responsibility for the day to day advice provided to a client. (Posted March 18, 2011) Preparing Brochure SupplementsQuestion V. 1Q: When preparing brochure supplements for supervised persons, may an adviser bundle the required information of all or a group of supervised persons together under each item (i.e. with no separate section for each supervised person)? For example, may my advisory firm use a group brochure supplement that provides a list of supervised persons under Item 1 and states under Item 2 that “all our supervised persons are college graduates and have more than 10 years of experience in the advisory industry”? A: No. Instruction 6 of the Instructions for Part 2B of Form ADV provides that each supervised person must have a separate and distinct brochure supplement containing separate responses to each of the six items required by Part 2B. (Posted March 18, 2011) Question V. 2Q: Item 2 of Part 2B permits the listing of professional designations so long as they are accompanied by a “sufficient explanation of the minimum qualifications required for each designation to allow clients to understand the value of the designation.” May my firm include a brief explanation and refer the client to the organization or its website where they may find additional information on the qualifications and other characteristics of the designation? A: An adviser must include in the brochure supplement sufficient explanation of the minimum qualifications required for each designation that allows clients to understand the value of the designation. The adviser may refer the client to the organization or its website for additional information as long as the adviser has a reasonable basis for believing that the information provided by the organization is accurate and not misleading at the time the adviser delivers the brochure supplement. (Posted March 18, 2011) Question V. 3Q: Item 6 of Part 2B requires an adviser to explain how it supervises the supervised person and to provide contact information for the person responsible for supervising the supervised person’s advisory activities. If the brochure supplement is for a supervised person that also is a registered representative of a broker-dealer, does Item 6 require an adviser to explain how it supervises the brokerage activities of the supervised person and identify the supervisor regarding those activities? A: No. The explanation of how an adviser supervises, and the identification of a person responsible for supervision, need not address services other than investment advice the supervised person may provide to clients. However, Item 4 of Part 2B would require an adviser to disclose a supervised person’s other business activities, including whether he or she is a registered representative of a broker-dealer, and describe any material conflicts of interest and how the adviser addresses such conflicts. (Posted March 18, 2011) Delivery of Brochure SupplementsQuestion VI. 1Q: Clients may work with the same supervised person in multiple advisory programs. Does an adviser satisfy the brochure supplement delivery requirement under rule 204-3 by delivering one brochure supplement at or before the time the supervised person begins to provide advisory services to a client who participates in the first program? A: Yes. Rule 204-3 does not require an adviser to deliver more than one brochure supplement to a client who participates in multiple advisory programs or who has more than one account serviced by the same supervised person. (Posted March 18, 2011) Question VI. 2Q: For clients who have not agreed to electronic delivery, is delivery of the BrokerCheck or IAPD report acceptable to satisfy delivery requirements relating to disciplinary events under Item 3 of Part 2B? A: No. (Posted March 18, 2011)
http://www.sec.gov/divisions/investment/form-adv-part-2-faq.htm
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