Securities Law Blog

For the past 21 years investment advisors registered with the SEC have been required to provide clients with a brochure explaining the adviser’s qualifications, investment strategies, and business practices. Recently the Securities and Exchange Commission (SEC) adopted new rules regarding the information that registered investment advisers must provide to their clients and prospective clients.

The brochure is comprised of the second part of the investment advisors SEC registration form, known as Form ADV Part 2.

According to SEC Chairman Mary L. Schapiro, the amendments to Part 2 “will help transform the brochure into a plain English narrative that is well-suited to serve investors’ needs.”

The changes will add depth to the descriptions of investment advisers’ explanations of advisory services, fees, methods of risk analysis, disciplinary history, code of ethics, and brokerage practices.

One of the biggest changes is the disclosure of conflicts of interests, which will be followed by an explanation of how the investment adviser addresses those conflicts. This change is notable for advisers or an affiliate who might have a material financial interest in a client account for which it makes recommendations to clients, or buys or sells. “The investment advisor must also disclose whether it or an affiliate invests (or is allowed to invest) in the same securities that it recommends to clients or in related securities, such as options or other derivatives.” In addition, an investment adviser that “trades in the recommended securities at or around the same time as the client has to explain the specific conflicts of interest.”

Other conflicts of interest outlined on the brochure will include performance-based fees that an investment adviser may receive from some accounts and not others, as well as soft dollar practices, client referrals, directed brokerage and trade aggregation.

The current format of the brochure is made up of advisers’ responses to a series of multiple choice and fill-in-the-blank questions, which in some cases does not allow investment advisors to bet describe their business or conflicts.