Speech by SEC Commissioner:
Opening Statement at SEC Open Meeting—Amendments to Form ADV (Final Rule)
Commissioner Elisse B. Walter
U.S. Securities and Exchange Commission
July 21, 2010
I too would like to thank the staff, and especially the Division of Investment Management, Buddy Donohue, Bob Plaze, Sarah Bessin, Dan Kahl, Vivien Liu, and Don Evans, for your labor on the final recommendations before us today. I particularly want to thank you for all the time you spent discussing this matter with me and my office. I also want to thank my counsel, Christian Broadbent, for his outstanding efforts on my behalf. I support the recommendations, and believe that they have the potential to improve substantially the disclosures that investment advisers make to clients about the firm and the individuals providing the investment advice, and to do it at the time that matters: before the advisory relationship is nailed down, and periodically thereafter.
These rules facilitate real, understandable communication between adviser and client. The communications burden rests on advisers and their counsel; they must implement the rules in the spirit in which they were adopted. If they draft to clarify and avoid confusion, and concern themselves with telling the adviser's story, rather than simply throwing in the kitchen sink to protect against legal liability, these changes will be a seminal step forward.
For more than 30 years, the Commission has required investment advisers to provide clients with a basic disclosure document in ADV Part 2 that is commonly called the "brochure." The current brochure is organized in a "check-the-box" format, however, requiring responses to a series of multiple choice and fill-in-the-blank questions.
This disclosure framework has become rather worn over time, and updating and improvement is long past due. Quite significantly in my view, the disclosure of conflicts of interest—described as a critical component to the fulfillment of an advisers fiduciary duty—on Form ADV has confused clients. We need to change that, and take all possible steps to ensure that advisory clients get the information they need to make informed decisions regarding the advisers they use.
The changes that we are making today to the brochure are designed to do just that. The move to narrative format alone is a rather significant one. Although there is certainly a balance to be struck between making sure that clients receive the information they need to make decisions and also that they are not overwhelmed by the information they receive, I believe that today's recommendations have done that. Properly implemented, these rules guide advisers to a client-oriented disclosure—or, as I want to repeat, communications—document with a meaningful and understandable narrative discussing the important components of an advisory business and conflicts of interests. This is critical for investors.
I am pleased to see that we are requiring advisers to present information in the brochure in a consistent, uniform manner. Here too, there is a balance to be struck—we want to let an adviser tell her story, but we also want investors to be able to find particular chapters of that story easily and make adviser-to-adviser comparisons. I believe that these changes have the potential to provide information to clients and potential clients in a manner that will really help them to make informed decisions about which adviser to choose. Advisers with multiple advisory programs could use separate brochures for each program, but that would not be required. I am very interested to see the new disclosure in this uniform format as it starts to come in. Once again, I cannot say often enough that I strongly urge advisers and their counsel to make the disclosures as readable as possible, with clients and their decision making in mind.
Now that the brochure will be filed with the Commission, we are able to provide investors with another important tool—the ability to compare advisers easily. A potential client will be able to look online at several brochures and compare them when making their decision regarding which adviser to hire and whether to switch advisers. Electronic filing with us is another change that I believe is overdue, and I strongly support it.
I am also pleased to see that the instructions to the brochure and brochure supplement would provide guidance to advisers regarding the clarity and usefulness of their disclosures, especially regarding conflicts of interest. The instructions first make clear that advisers need to use definite language in their disclosures, and that they should discuss only conflicts that the adviser has or is reasonably likely to have, and practices in which it engages or is reasonably likely to engage. This is certainly in line with an adviser's disclosure obligations as a fiduciary. Another instruction to the brochure and supplement capture the obligations that advisers must provide clients with sufficiently specific facts so that clients can understand the conflicts of interest and business practices, and can give informed consent to such conflicts and practices or reject them.
The importance of having investors receive meaningful disclosures, that they can understand and use to make decisions, cannot be overstated. Yet, too often we have seen disclosure to clients regarding critical issues, such as conflicts, that undoubtedly leave them more confused than informed as to whether a conflict even exists. In adviser disclosure and elsewhere, we often see problematic disclosure that may obscure or confuse, rather than communicate. I am hopeful that the brochure will serve as a model for clear communication in other areas and that practitioners will comply with the spirit, as well as the letter, of the instructions. If so, it may well be one of the most important investor protection initiatives in decades. I look forward to applying the same principles in other areas, such as broker-dealer disclosure.
It's important for lawyers who may be drafting these documents to understand that use of language that cleverly obscures the real story or of highly equivocal language seeking to absolve their clients of all real or imagined conflicts or bad practices will be self-defeating. In such a situation, how could we (or any other finder of fact) infer client consent under the Advisers Act?
I also support the recommendations regarding the brochure supplement. I believe that disclosure regarding the education, business experience, disciplinary history, and substantial outside business activities and compensation will be helpful for clients, even sophisticated ones, to receive. Although we are not requiring it today, at some point I would like to explore further the idea of having the supplements filed with the Commission. If nothing more, this would provide potential clients with information regarding advisory personnel that may be useful to them when deciding on a particular investment adviser.
Once again, I support the staff's recommendations today.