Speech by SEC Chairman:
Opening Statement at the SEC Open Meeting—Form ADV Amendments
Chairman Mary L. Schapiro
U.S. Securities and Exchange Commission
July 21, 2010
Next, we will consider adopting amendments to Form ADV, Part 2. This is the principal disclosure document that investment advisers, who are registered with the SEC, must provide to clients and prospective clients.
Commonly referred to as the 'brochure' this document explains the advisers' qualifications, investment strategies, and business practices.
In its current form, it requires advisers to respond to a series of multiple-choice and fill-in-the-blank questions organized in a "check-the-box" format. But, the format frequently does not correspond well to an adviser's business. And, in some cases, the required disclosure may not describe the adviser's business or conflicts in a way that is truly accessible to the investor.
The changes we are considering today are designed to provide clients with greater information about the individuals who will provide them with investment advice. Our amendments to the brochure will help advisers move past the check-the-box, fill-in-the-blank approach and will transform the brochure into a plain English narrative that is well-suited to serve investors' needs—a narrative that will describe the adviser's conflicts, compensation, business activities, and disciplinary history.
If adopted, the amendments will also require that these brochures be available electronically, through the Commission's website. That will enable investors, regulators, and the public to have easy access to them.
Since I returned to the Commission in January 2009, the need for ADV reform and a brochure update has been a constant refrain in conversations and visits with regional SEC staff across the country. So while the changes are a critical investor-oriented reform, the new ADV Part 2 also will enable our staff to do its job better.
These changes will allow clients ready access to information about advisers of a wholly different character and quality than is available under the current regime. It will enable investors to better evaluate their current advisers, or comparison shop for a new adviser that best serves an investor's needs.
And significantly, I believe that this disclosure may result in advisers modifying business practices and compensation policies which might pose conflicts, in ways that better serve the interests of clients.
Today's vote has been a long time coming. For more than 30 years, the Commission has required registered investment advisers to deliver a written disclosure statement to clients. In 2000, the Commission proposed a complete overhaul of Form ADV that didn't result in a change to Part 2 of that form. In 2008, the Commission re-proposed the changes which we are considering today.
While I will leave it to Buddy Donohue and his team to detail the main features of the new rule, there are a few I am particularly pleased about and want to highlight.
First, the rules under consideration would require information to be presented in a consistent, uniform manner, allowing investors to compare information between brochures—and therefore between advisers.
Second, the rules will establish important new standards that will require financial firms to provide a client with key information about the individual from whom they are receiving advice.
Finally, the new rules will require advisers to deliver the brochure to a client before or at the time the adviser enters into an advisory contract with the client. And, the advisers will have to provide each client an annual summary of material changes to the brochure and either deliver a complete updated brochure or offer to provide the client with the updated brochure.
I know an extraordinary amount of work has gone into this over the years and I want to thank the Divisions of Investment Management (Bob Plaze, Sarah Bessin, Dan Kahl, Vivien Liu, and Don Evans in particular), Trading and Markets (Paula Jenson and Lourdes Gonzalez), Risk, Strategy, and Financial Innovation (Harvey Westbrook, Chuck Dale and Woodrow Johnson), Corporation Finance (Gerry Laporte, Mauri Osheroff and Paul Dudek) and Enforcement (Charlotte Buford and Lydia Pereira), and the Offices of Compliance Inspections and Examinations (Gene Gohlke and Jim Reese), Investor Education and Advocacy (Lori Schock, Mary Head, Owen Donley, and Rich Ferlauto), and General Counsel (Meridith Mitchell, Lori Price, Jill Felker and Vince Meehan). All of these individuals collaborated from across the agency in designing these amendments and bringing us this recommendation. Your efforts will bring better disclosure to investors and help them make more informed choices when evaluating investment advisers.
Now, I would like to turn the proceedings over to Buddy Donohue to introduce his team.