June 13, 2000
Jonathan G. Katz
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Electronic Filing by Investment Advisers; Proposed Amendments to Form ADV (File No. S7-10-00)
The Advocacy Advisory Committee (AAC) of the Association for Investment Management and Research1 (AIMR) is pleased to comment on the U.S. Securities and Exchange Commission's rule proposal, Electronic Filing by Investment Advisers; Proposed Amendments to Form ADV (File No. S7-10-00). The AAC is a standing committee of AIMR charged with coordinating the priorities of AIMR Advocacy committees and reviewing and responding to new regulatory, legislative, and other developments affecting AIMR's global membership.
The AAC strongly supports the Commission's proposed revisions to Form ADV. We believe that these revisions are an appropriate response to the needs of both investors and investment advisers alike. We applaud the Commission on developing and issuing such a thorough and well-reasoned proposal.
In our previous letters to the Commission on issues related to Form ADV, we made a number of recommendations that we are pleased to see in the proposal. Specifically, we stressed that any revised Form ADV must provide investors with more meaningful information as well as give investment advisers greater flexibility in presenting that information.2 With respect to Part II of the form, we urged the Commission to replace the "check-the-box" and "fill-in-the-blank" formats with a format comparable to that for wrap-fee programs (now required by Schedule H or to allow the information to be provided in a firm brochure. We also note that the proposals include many of our recommendations for the content of the firm brochure, including policies concerning personal securities trading, information on disciplinary proceedings, and information about performance presentation. We are particularly pleased that the Commission is proposing a system that will allow advisers to satisfy both state and federal notice and/or filing requirements with one form.
We also believe that the proposed firm brochure will give the firm sufficient flexibility to present and explain its business practices in a meaningful way. Requiring this brochure to be written in "plain English" ensures that information will be effectively communicated to investors. We believe that both the form and the content of the brochure will provide investors with important information about the firm.
I. Investment Advisor Registration Depository
The AAC supports the creation of the Investment Adviser Registration Depository (IARD) that will allow investment advisers to make filings electronically with both the Commission and the states through an Internet-based system. Since implementation of Part II of the National Securities Market Improvement Act, federally-registered investment advisers have been relieved of many overlapping, and sometimes conflicting, registration requirements imposed by the states. However, some investment adviser representatives (IA Reps) of federally-registered advisers still must register with the states and comply with the information requirements of those states. We believe that allowing a federally-registered adviser to register its IA Reps by making the required "notice filings" through the IARD will significantly streamline the registration process and further encourage uniform disclosures.
We also support having the IARD serve as an information depository for investors who seek information on investment advisers and IA Reps. This depository will allow the public to access all information contained on the IARD, including the adviser's Form ADV, its disciplinary records, and the records of its IA Reps. We believe that investors not only have the right to know the information contained in the ADV and the disciplinary history of those providing advisory services but that this information should be easily accessible to them. By making this information available through the IARD, we believe that investors will have a better ability to evaluate those to whom they entrust their financial security.
Finally, we understand that NASD Regulation, Inc., (NASDR) has been contracted to perform certain administrative functions related to the IARD. We wholeheartedly agree that this contractual relationship should not give NASDR the power or authority to regulate investment advisers. We do not believe that a self-regulatory organization (SRO) with investment adviser regulatory oversight is needed at this time. Moreover, even if the Commission were to decide such an SRO was needed, we do not believe the NASDR is the appropriate organization to fulfill that function. We agree with the Commission that only Congress can make the determination of whether such regulation is needed and, if so, the appropriate entity to assume that role.
II. Form ADV
Part 2--Firm Brochure
The Committee wholeheartedly supports the Commission's proposed format change requiring use of a narrative brochure written in "plain English" to provide information on the adviser's fees, business practices, and conflicts of interest. We believe that this narrative disclosure (modeled after Schedule H used by wrap fee program sponsors) will improve readability. We believe that both prospective and existing clients will find this brochure more useful and, therefore, will give them more meaningful information. We believe that the new format will permit the adviser to prepare a document that describes itself and its services in a way that is most relevant to the type of clients it seeks. The format, as well as the content, will provide investors with information about the firm.
We agree with the Commission's proposal that the firm brochure be updated at least annually or sooner if there are material changes to the information provided. We had been concerned that brochures might have a limited "shelf life" and firms would incur unnecessary expense if they needed to update it frequently. The Commission's proposal to use a "sticker" to reflect material changes in between annual printings is a good one and alleviates those concerns.
In addition to supporting the change in format, we also strongly support the proposed content of the brochure. In particular, we support the requirements that there be new or enhanced disclosure of the following:
This information is important to clients and lies at the heart of the fiduciary relationship between the client and the adviser. We believe that requiring the adviser to address these areas in a narrative format will result in more meaningful disclosure to the client rather than the "boilerplate" responses we have seen result from the questions on the current Form. In addition to these disclosures, however, we recommend that a discussion of the adviser's code of ethics be required.
The AAC strongly supports the use of the proposed brochure supplement as a means of providing investors with information on the firm's advisory personnel. We believe that investors will be better informed and, therefore, have more confidence in the investment management process if they receive information on the individuals that provide investment advice for their account rather than on the firm's executives.
Although investors will appreciate receiving background information on the individuals who affect their accounts, they may still lack a contact person to whom they can direct questions. Therefore, we welcome the proposal that the supplement also contain the name, title and telephone number of the person responsible for supervising the advisory activities of those individuals.
We also support the proposal to include historical information on an individual's relevant professional designations, including revocation or suspension of a designation. We recommend that the Instructions to the supplement make clear that any reinstatements of designations also be noted, so that the investor has a complete picture of an individual adviser's disciplinary history.
Limitation on Disclosure of Disciplinary History of the Advisory Firm
As proposed, the firm brochure would contain information on the advisory firm's disciplinary history with respect to specific events that reflect on the integrity of the firm and its management. These events would include convictions for theft, bribery, perjury, forgery, and violations of the securities laws. Similarly, the proposed supplement to the firm brochure would require disclosure of the disciplinary history of individuals, with added information on any proceeding revoking or suspending a professional attainment, designation, or license of the supervised person. In both cases, the Commission proposes to limit this information to events occurring during the past 10 years. We urge the Commission to reconsider this 10-year time limit. We believe that a time limit is not appropriate and that both the firm brochure and brochure supplement should disclose information concerning ALL prior felony convictions, regardless of when they occurred.
Although the Commission is setting a time limit on these disclosures because it lacks the ability to take enforcement action on older offenses, we strongly believe that the disclosure of all felony convictions is essential information for investors. Only an investor can determine the significance of these offenses when selecting an adviser. While the ten-year time frame may correlate to provisions of the law that concern the probative value of a criminal history, limiting disclosure of such offenses conceals information that we believe many investors would find relevant.
We believe that most investors would favor knowing the history of an investment firm or professional and would find a person's past ability to obey the law relevant to that person's integrity, character, history, judgment, and decision-making ability. Investors who put their financial well being into the hands of investment professionals have a right to know that they can trust those who control their financial assets. Even if investors were to discount the value of offenses older than 10 years, their knowing that a thorough and effective disclosure system exists strengthens their confidence in the institutions that safeguard investor protections and maintain market transparency.
The AAC strongly supports the Commission's efforts to redesign Form ADV to make it more meaningful for investors. A "user-friendly" document, written in "plain English," that simultaneously satisfies both federal and state requirements is a significant step in streamlining the investment adviser and IA Rep registration process and encouraging more uniform disclosures on one hand and less "boilerplate" on the other.
In particular, we support the proposed disclosure requirements regarding potential conflicts of interest, including soft dollar and other brokerage practices, personal trading policies, and compensation arrangements, as well as the new focus on firms that advertise their investment performance through industry standards. Further, we support the proposed information that must be provided on the individuals involved in the decision-making process, a discussion of the process itself, and relevant disciplinary information on the firm and its supervised persons. We believe that all of the proposed revisions will make the Form a more substantive and useful document.
We appreciate the opportunity to comment on the Commission's rule proposal, Electronic Filing by Investment Advisers; Proposed Amendments to Form ADV (File No. S7-10-00). If the Commission or its staff have any questions or if we can provide any additional information on our comments, please contact Linda Rittenhouse by phone at 1.804.951.5333 or by email at firstname.lastname@example.org..
/s/ Deborah A. Lamb
Deborah A. Lamb
Advocacy Advisory Committee
/s/ Linda L. Rittenhouse
Linda L. Rittenhouse
cc: Advocacy Distribution List
1 The Association for Investment Management and Research is a global, not-for-profit organization of over 42,000 investment professionals in 95 countries. Through its headquarters in Charlottesville, Virginia and more than 94 Member Societies and Chapters throughout the world, AIMR provides global leadership in investment education, professional standards, and advocacy programs.
2 See January 21, 1998 and March 15, 1999 letters from AIMR's Advocacy Advisory Committee to Robert E. Plaze, U.S. Securities and Exchange Commission.