Part 1 of New Form ADV Adopted: Electronic Filing to Become Mandatory
October 20, 2000
The Securities and Exchange Commission (SEC) recently adopted Part 1 of its revised, electronic Form ADV and its proposal for an electronic filing system under which investment advisers will file the revised Form ADV electronically. The new filing system, called the Investment Adviser Registration Depository (IARD), will permit investment advisers to satisfy their filing obligations with both the SEC and the state securities commissions in a single electronic filing. Certain of the information filed with the IARD will be made available to the public free of charge via an Internet web site. The IARD has been modeled after the Central Registration Depository (CRD) currently used by broker dealers to make their filings with the SEC, state securities commissions and NASD Regulation, Inc. (NASDR). Like the CRD, the IARD will be operated by NASDR.
The IARD will eventually accept Part 2A of Form ADV, the new plain English document intended to satisfy the SEC’s existing brochure rule. Due to the number of comments received by the SEC regarding its proposal to revise Part 2 of Form ADV, however, adoption of the new electronic brochure has been deferred
THE INVESTMENT ADVISER REGISTRATION DEPOSITORY
The key benefits of the IARD are the ease with which investment advisers will be able to apply for registration, amend active registrations, and withdraw from registration using desktop computers without specialized equipment or software. The system will also permit SEC registered advisers to send their periodic “notice filings” to the state securities commissions and pay state filing fees through the IARD. After obtaining an IARD user name and password from NASDR (utilizing a paper request), anyone wishing to register as an investment adviser will be able to access the new Form ADV online. He will then have the option of completing it online or saving a partially completed draft of the Form. The new Form ADV is intended to be a smart form. An interactive process of completing the Form will filter out questions that are not relevant to the particular applicant. Thus, an adviser indicating that he is applying for SEC registration will not see the items that relate solely to state registrations. Allegedly, the Form will also identify inconsistent responses and prevent a form containing errors from being filed.
The IARD will begin to receive electronic filings after January 1, 2001. The system will be “rolled out” in four phases. Only the first phase will be effective in January. The four phases are as follows:
* SEC registered advisers and new applicants for SEC registration will be the first to use the system for the purpose of filing Part 1 of the new Form ADV and submitting notice filings to state securities commissions. Previously registered investment advisers will have to re-file Part 1 of their electronic Forms ADV during the first four months of 2001 according to a schedule developed by the SEC based upon SEC filing numbers and fiscal year ends. Both temporary and continuing hardship exemptions are available in special cases. The IARD will also accept filings of state-registered advisers in January 2001. The SEC now believes that all states will accept filings of Form ADV (as well as withdrawal requests on Form ADV-W) through the IARD and that some state may require state-registered advisers to use the IARD. Any uncertainty concerning state requirements should be resolved by contacting the applicable state securities authority or authorities.
* NASDR will release the internet-accessible public disclosure system in mid-2001, after the first IARD filings have been made. Initially, investors will be able to search the IARD database by the name of the adviser or the name of an individual to access information filed on Form ADV. Later, the IARD’s capabilities will be expanded to permit searches based upon certain other criteria such as the types of services provided and geographic location. Internet access to social security numbers and private residence addresses, as well as “contact employee” information, will be blocked.
* NASDR will release the investment adviser representative licensing system administered by the state securities commissions later in 2001.
* Lastly, the IARD is intended to accept filings of revised Part 2A of Form ADV, the new plain English brochure.
Advisers using the IARD will be required to establish an account with NASDR and to maintain sufficient funds in the account to pay IARD filing fees (which will range from $100 to $550 per year), as well as the fees of the various state securities commissions to which they submit filings. The IARD will automatically calculate the amount of the fees due and will remit funds to the states. This fall, each SEC-registered adviser will receive by mail the forms and instructions needed to set up and IARD user account with NASDR. After the forms have been completed, signed and mailed back to NASDR, NASDR will open the adviser’s IARD account, assign the adviser a CRD number, issue passwords for the adviser’s authorized personnel, and provide instructions on funding the IARD billing account. Advisers included in the group that must re-file Part 1 of Form ADV during January, 2001, face a November 1, 2000, deadline for setting up their IARD accounts.
Until the revised version of Part 2 of Form ADV is adopted, investment advisers must continue to deliver “old” Part II to prospective clients and annually offer them to clients under the SEC’s existing brochure rule. Oddly, effective as of October 10, 2000, advisers are no longer required to submit paper copies of Part II of Form ADV to the SEC at all. No Part II filings will be required until the IARD is able to accept advisers’ Part 2A brochures electronically. Nevertheless, Part II will be considered filed with the SEC during this interim period. A consequence of this decision not to require an adviser to submit its old Part II of Form ADV to the SEC during this interim period is that the SEC’s updating requirements will no longer apply. However, under existing anti-fraud rules, investment advisers are prohibited from providing clients with a materially misleading Part II or other form of the brochure. Thus, all advisers continues to be legally obligated to update the disclosures they provide to avoid misleading clients.
REVISED FORM ADV
PART 1
The existing Form ADV consists of two parts. Part I asks for information to be supplied by responding to fill-in-the-blank, multiple choice or check-the-box type questions. The information solicited has to do with the adviser’s business, the persons who own or control the advisory firm, and whether the adviser or certain members of its key personnel have ever been sanctioned for violating securities laws or similar laws embodying concepts relating to integrity. Part I is used by the SEC principally to decide whether or not an application for registration should be approved or whether an effective registration should be revoked.
Part I of the current Form ADV is being replaced by Part 1 of the revised Form ADV. As a result of the adoption of NSMIA and the withdrawal from Federal registration of most investment advisers managing less than $25 million in assets, the majority of advisers in the United States are now registered exclusively with the states rather than with the SEC. As a consequence, the new Part 1 will consist of two Subparts. All advisers will complete Part 1A, but only state registered advisers will complete Part 1B.
Part 1A. Part 1A will be similar to existing Part I. It will ask for information through a series of fill-in-the-blank, multiple choice and check the box questions. The principal differences between the proposed Part 1A and the existing Part I are the following:
* Identifying Information. The new Form asks for an adviser’s CRD number (if any), any web site addresses and e-mail addresses the adviser uses, as well as the adviser’s fax number.
* Educational and Business Background. The often redundant incorporation of this information in both Part I and Schedule F of Part II in the existing Form ADV has been eliminated. Educational and business background information will appear exclusively in the adviser’s brochure and brochure supplements.
* SEC-Registration Eligibility. Schedule I of Form ADV, used to determine an investment adviser’s eligibility to register with the SEC, has been eliminated and the information requested by Schedule I added to Part 1A.
* Disciplinary Proceedings. All questions will be limited to events occurring during the past ten years and will require separate forms called Disciplinary Reporting Pages (DRPs) for reporting the details of (a) criminal proceedings, (b) civil proceedings, and (c) regulatory proceedings. The DRPs replace existing schedules D and E and expand the list of events that must be reported.
* Control Person Disclosure. Indirect ownership interests of less than 25% will no longer have to be disclosed.
* Small Businesses. A new question has been added to identify whether an adviser is a small business. Only those SEC registered advisers with less than $25 million of assets under management (a very small number) will respond to this item.
* Schedule A, B, C. All three of these schedules have been eliminated. The information that was formerly provided on Schedule D will now be provided on new Schedules A (for direct owners and executive officers, general partners and limited liability company members), B (for indirect owners) and C (for amendments to new Schedules A and B). New Schedule D will be used to report additional information and details of certain responses to questions in Part 1A.
Part 1B. Part 1B has been designed by the North American Securities Administrators Association (NASAA) on behalf of the several state securities commissions. It will be completed exclusively by investment advisers who are not SEC registered. Part 1B will solicit information about bonding, arbitration actions, other civil and regulatory actions, and whether sole proprietors have satisfied certain qualifying examination requirements or obtained certain professional designations.
PART 2
Part II of existing Form ADV addresses particular business practices engaged in by the adviser, fees that the adviser may charge, and conflicts of interest that an adviser may face while providing money management services. Part II (supplemented by Schedule F), or a written brochure containing the same information, must be delivered to a prospective client before an investment adviser enters into an arrangement with the client. In addition Part II must be offered to every client at least annually. The SEC’s proposals incorporate substantial revisions to Part II of Form ADV, including the redrafting of items in simpler, plainer language. As noted above, however, adoption of Part 2 of Form ADV, the SEC’s revised version of existing Part II, has been deferred and “old” Part II is still required.
For additional information on this topic, you may contact Howard A. Neuman or Carol Spawn Desmond.