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U.S. Securities and Exchange Commission

SEC Proposes Plain English Narrative Disclosure By Investment Advisers To Investors


SEC Chairman Christopher Cox speaking
Chairman Cox Discusses Proposal to Help Investors:
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Washington, D.C., Feb. 13, 2008 — The Securities and Exchange Commission today voted unanimously to propose rule amendments requiring investment advisers to prepare and deliver to clients and prospective clients a narrative brochure written in plain English.

Brochures would be made available to the general public through the SEC sponsored Investment Adviser Public Disclosure Web site. The narrative would publicly disclose to investors more detailed information about an investment adviser's business practices, conflicts of interest, and disciplinary history.

"Today's proposal is a significant event for investment advisers and the investors that hire them. The release addresses disclosure, which is at the core of the fiduciary principles that govern the relationship between advisers and their clients," said Andrew J. Donohue, Director of the SEC's Division of Investment Management. "Central to the proposal is narrative plain English disclosure to advisory clients and prospective clients that will empower them to make informed decisions when hiring advisers and to manage the advisory relationship on an ongoing basis."

The Commission is proposing amendments to Part 2 of Form ADV, the adviser brochure, and related rules under the Investment Advisers Act of 1940. If adopted, more than 10,000 investment advisers registered with the SEC would be required to provide clear, current, and meaningful disclosure in narrative form to nearly 20 million advisory clients.

Most advisers currently use a check-the-box, fill-in-the-blank form for their brochures. The plain English narrative brochure being proposed by the Commission would provide investors with more detailed information about an adviser's business practices, including the types of advisory services they provide, fees they charge, and the risks that clients can anticipate. The narrative also would disclose the disciplinary history of an investment adviser including any violation of the securities laws, as well as conflicts of interest such as the use of affiliates to execute transactions, the use of client brokerage to obtain "soft dollars benefits," and the adviser's interests in certain transactions.

The SEC proposal also would address developing areas of concern, including conflicts of interest arising from the side-by-side management of clients who pay performance fees (such as hedge funds) and those who do not; conflicts of interest arising from an adviser's receipt of compensation from issuers of financial products the adviser recommends to clients; and qualifications of a firm's employees who give advice to clients.

Public comment on the proposed amendments should be received by the Commission no later than 60 days after their publication in the Federal Register.

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The full text of the detailed release concerning these proposed rule and form changes will be posted to the SEC Web site as soon as possible.

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Modified: 03/04/2008