Articles Tagged with Investment Advisers

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Written by Michael Wu

On January 26, 2011, the SEC proposed a rule that would require SEC-registered advisers to hedge funds, private equity funds and other private funds to report information to the Financial Stability Oversight Council (“FSOC”) that would enable it to monitor risk to the U.S. financial system.  The information would be reported to the FSOC on Form PF and the information reported on Form PF would be confidential.

The proposed rule would subject large advisers to hedge funds, “liquidity funds” (i.e., unregistered money market funds) and private equity funds to heightened reporting requirements.  Under the proposed rule, a large adviser is an adviser with $1 billion or more in hedge fund, liquidity fund or private equity fund assets under management.  All other advisers would be regarded as smaller advisers.  The SEC anticipates that most advisers will be smaller advisers, but that the large advisers represent a significant portion of private fund assets.

Smaller advisers would be required to file Form PF once a year and would report only basic information about their hedge funds, private equity funds and/or other private funds, such as information regarding leverage, credit providers, investor concentration, fund performance, fund strategy, counterparty credit risk and the use of trading and clearing mechanisms.

Large advisers would be required to file Form PF quarterly and would provide more detailed information than smaller advisers.  The information reported would depend on the type of private fund that the large adviser manages.

  • Large advisers to hedge funds would report, on an aggregated basis, information regarding exposures by asset class, geographical concentration and turnover.  If a hedge fund has a net asset value of at least $500 million, the adviser would report information regarding the fund’s investments, leverage, risk profile and liquidity.
  • Large advisers to liquidity funds would report the types of assets in their liquidity funds, information relevant to the risks of the funds, and the extent to which the liquidity funds comply with Rule 2a-7 of the Investment Company Act of 1940, as amended.
  • Large advisers to private equity funds would respond to questions regarding the extent of leverage incurred by their funds’ portfolio companies, the use of bridge financing and their funds’ investments in financial institutions.

The SEC’s public comment period on the proposed rule will last 60 days.

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Written by Michael Wu

On January 21, 2011, the SEC released its study on the effectiveness of the standard of care required of broker-dealers and investment advisers that provide personalized investment advice regarding securities to retail customers (“Covered Broker-Dealers and Investment Advisers”).  The study also considered the existence of regulatory gaps, shortcomings or overlaps that should be addressed by rulemaking.  The study was prepared pursuant to Section 913 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

The study recommends that the SEC establish a uniform fiduciary standard for Covered Broker-Dealers and Investment Advisers that is at least as stringent as the fiduciary standard under Sections 206(1) and (2) of the Investment Advisers Act of 1940, as amended.  The SEC staff stated that under this standard, Covered Broker-Dealers and Investment Advisers must “act in the best interest of the customer without regard to the financial or other interest of the broker, dealer, or investment adviser providing the advice.”

To implement the uniform fiduciary standard, the study recommends that the SEC adopt rules to address the following:

  • Disclosure Requirements.  Rules should be adopted to address both the existing “umbrella” disclosures (e.g., ADV Part II) and specific disclosures provided by Covered Broker-Dealers and Investment Advisers when a transaction is executed.
  • Principal Trading.  Rules should be adopted to address how Covered Broker-Dealers can satisfy the uniform fiduciary standard when engaging in principal trading activities.
  • Customer Recommendations.  Rules should be adopted to address the duty of care obligations that Covered Broker-Dealers and Investment Advisers have in making recommendations to retail customers.

The study further recommends that the SEC harmonize other areas of broker-dealer and investment adviser regulation, such as regulations pertaining to advertising and communication, the use of finders and solicitors, supervision and regulatory reviews, licensing and registration of firms, licensing and registration of associated persons, and maintenance of books and records.

Based on the study, it appears likely that the SEC will adopt a uniform fiduciary standard in the near future.  However, at this time, it is not clear how the standard would affect the manner in which Covered Broker-Dealers and Investment Advisers conduct their businesses.

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Written by Michael Wu

On January 19, 2011, the Securities and Exchange Commission (“SEC”) released its study regarding the need for enhanced examination and enforcement resources for investment advisers.  Specifically, the SEC examined the following areas: (i) the number and frequency of examinations of investment advisers by the SEC during the past 5 years, (ii) whether the SEC’s designation of one or more self-regulatory organizations (“SROs”) to augment the SEC’s oversight of investment advisers would improve the frequency of examinations of investment advisers, and (iii) the current and potential approaches to examining the investment advisory activities of dually registered broker-dealers and investment advisers and investment advisers that are affiliated with broker-dealers.

According to the study, the number of registered investment advisers, including hedge fund and private equity fund managers, and the overall assets managed by such advisers has increased over the past 6 years, while the SEC staff dedicated to examining investment advisers has declined.  The study noted that the number of SEC examinations decreased since 2004 by nearly 30% and the frequency of such exams by 50% – this was before the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) created additional responsibilities for the SEC.  Under the Dodd-Frank Act, the SEC will be required to (i) examine larger, more complex entities, which take more resources to examine; (ii) examine municipal advisers, security-based swap dealers, major security-based swap participants and security-based swap data repositories, which are now required to register with the SEC; and (iii) conduct annual examinations of credit rating agencies and clearing agencies designated as systemically important.  In Commissioner Elisse B. Walter’s speech regarding the study, she stated that “the Commission is not, and, unless significant changes are made, cannot fulfill its examination mandate with respect to investment advisers.”

The SEC has recommended that Congress consider the following three approaches to strengthen the SEC’s investment adviser examination program: (i) authorize the SEC to charge SEC-registered investment advisers “user fees,” which would be used to fund the investment adviser examination program; (ii) authorize one or more SROs to examine, subject to SEC supervision, all SEC-registered investment advisers; or (iii) authorize the Financial Industry Regulatory Authority (FINRA) to examine dual registrants for compliance with the Investment Advisers Act of 1940, as amended.

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By: Michael Wu

As the new year is upon us, we wanted to take a moment to remind you of some of the annual compliance obligations that you may have as an investment adviser that is registered with the Securities and Exchange Commission (the “SEC”) or with a particular state (“Investment Adviser”).  In light of the current regulatory environment, now more than ever, it is critical for you to comply with all of the legal requirements and best practices applicable to Investment Advisers.  The beginning of the year is a good time to review, consider and, if applicable, satisfy these requirements and best practices.

The following is a summary of the primary annual or periodic compliance-related obligations that may apply to Investment Advisers.  The summary is not intended to be a comprehensive review of an Investment Adviser’s tax, partnership, corporate or other requirements, nor an exhaustive list of all of the obligations of an Investment Adviser under the Investment Advisers Act of 1940, as amended (the “Advisers Act”) or applicable state law.  Although many of the obligations set forth below apply only to SEC-registered Investment Advisers, state-registered Investment Advisers may be subject to similar and/or additional obligations depending on the state in which they are registered.  State-registered Investment Advisers should contact us for additional information regarding their specific obligations under state law.

  • Update Form ADV.  An Investment Adviser must file an annual amendment to Form ADV Part 1 and Form ADV Part 2 within 90 days of the end of its fiscal year.  Effective on January 1, 2011, Investment Advisers must file both Part 1 and Part 2A of the Form ADV with the SEC through the electronic IARD system.  Accordingly, if you are SEC-registered adviser whose fiscal year ends on or after December 31, 2010, you must file Part 1A and Part 2A as part of your annual updating amendment by March 31, 2011.  If you are a state-registered adviser whose fiscal year ends on or after December 31, 2010, you must also file Part 1A, Part 1B and Part 2A as part of your annual updating amendment by March 31, 2011.
  • New FINRA Entitlement Program.  FINRA is implementing changes to its Entitlement Program, which provides access to an Investment Adviser’s IARD account.  Every adviser firm (new and existing) is now required to designate an individual as its Super Account Administrator (SAA).  The SAA must be an authorized employee or officer of the adviser firm.
  • Fund IARD Account.  An Investment Adviser must ensure that its IARD account is adequately funded to cover payment of all applicable registration renewal fees and notice filing fees.  Beginning November 15, 2010, Preliminary Renewal Statements (“PRS”), which list advisers’ renewal fees, are available for printing through the IARD system.  By December 10, 2010, an investment adviser should have submitted to FINRA through the IARD system, its preliminary renewal fee.  Any additional fees that were not included in the PRS will show in the Final Renewal Statements which are available for printing beginning January 3, 2011.  All final renewal fees should be submitted to FINRA through the IARD system by February 3, 2011.
  • State Notice Filings/Investment Adviser Representatives.  An Investment Adviser should review its advisory activities in the various states in which it conducts business and confirm that all applicable notice filings are made on IARD.  In addition, an Investment Adviser should confirm whether any of its personnel need to be registered as “investment adviser representatives” in any state and, if so, register such persons or renew their registrations with the applicable states.
  • Brochure Rule.  On an annual basis, an Investment Adviser must provide its private fund investors and separate account client(s) with a copy of its updated Form ADV Part 2A, or provide a summary of material changes and offer to provide an updated Form ADV Part 2A. The 2011 deadline for providing investors with Form ADV Part 2B depends on whether an Investment Adviser is a new or existing SEC-registered adviser and whether the Investment Adviser is providing it to prospective, new or existing investors.
  • Annual Assessment.  At least annually, an Investment Adviser must review its compliance policies and procedures to assess their effectiveness.  The annual assessment process should be documented and such document(s) should be presented to the Investment Adviser’s chief executive officer or executive committee, as applicable, and maintained in the Investment Adviser’s files.  At a minimum, the annual assessment process should entail a detailed review of:

1)      the compliance issues and any violations of the policies and procedures that arose during the year, changes in the Investment Adviser’s business activities and the effect that changes in applicable law, if any, have had on the Investment Adviser’s policies and procedures;

2)      the Investment Adviser’s code of ethics, including an assessment of the effectiveness of its implementation and determination of whether they should be enhanced in light of the Investment Adviser’s current business practices; and

3)      the business continuity/disaster recovery plan, which should be “stress tested” and adjusted as necessary.

  • Annual/Surprise Audit.  Because Investment Advisers are generally deemed to have custody of client assets, they must provide audited financial statements of their fund(s), prepared in accordance with U.S. generally accepted accounting principles, to the fund(s)’ investors within 120 days of the end of the fund(s)’ fiscal year.  Investment Advisers that do not provide audited financial statements to fund investors should remind their auditors that an annual surprise audit is necessary.
  • Annual Privacy Notice.  Under SEC Regulation S-P, an Investment Adviser must provide its fund investors or client(s) who are natural persons with a copy of the Investment Adviser’s privacy policy on an annual basis, even if there are no changes to the privacy policy.
  • New Issues.  An Investment Adviser that acquires “new issue” IPOs for a fund or separately managed client account must obtain written representations every 12 months from the fund or account’s beneficial owners confirming their continued eligibility to participate in new issues.  This annual representation may be obtained through “negative consent” letters.
  • ERISA.  An Investment Adviser may wish to reconfirm whether its fund(s)’ investors are “benefit plan investors” for purposes of reconfirming its fund(s)’ compliance with the 25% “significant participation” exemption under ERISA.  This is particularly important if a significant amount of a fund’s assets have been withdrawn or redeemed.  The reconfirmation may be obtained through “negative consent” letters.
  • Anti-money Laundering.  Although FinCEN withdrew its proposed anti-money laundering regulations for unregistered investment companies, certain investment advisers and commodity trading advisors, an Investment Adviser is still subject to the economic sanctions programs administered by OFAC and should have an anti-money laundering program in place.  An Investment Adviser should review its anti-money laundering program on an annual basis to determine whether the program is reasonably designed to ensure compliance with applicable law given the business, customer base and geographic footprint of the Investment Adviser.
  • Amend Schedule 13G or 13D.  An Investment Adviser whose client or proprietary accounts, separately or in the aggregate are beneficial owners of 5% or more of a registered voting equity security, and who have reported these positions on Schedule 13G, must update these filings annually within 45 days of the end of the calendar year, unless there is no change to any of the information reported in the previous filing (other than the holder’s percentage ownership due solely to a change in the number of outstanding shares).  An Investment Adviser reporting on Schedule 13D is required to amend its filings “promptly” upon the occurrence of any “material changes.”  In addition, an Investment Adviser whose client or proprietary accounts are beneficial owners of 10% or more of a registered voting equity security must determine whether it is subject to any reporting obligations, or potential “short-swing” profit liability or other restrictions, under Section 16 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
  • Form 13F.  An “institutional investment manager,” whether or not an Investment Adviser, must file a Form 13F with the SEC if it exercises investment discretion with respect to $100 million or more in securities subject to Section 13(f) of the Exchange Act (e.g., exchange-traded securities, shares of closed-end investment companies and certain convertible debt securities), which discloses certain information about such its holdings.  The first filing must occur within 45 days after the end of the calendar year in which the Investment Adviser reaches the $100 million filing threshold and within 45 days of the end of each calendar quarter thereafter, as long as the Investment Adviser meets the $100 million filing threshold.
  • Offering Materials.  As a general securities law disclosure matter, and for purposes of U.S. federal and state anti-fraud laws, including Rule 206(4)-8 of the Advisers Act, an Investment Adviser must continually ensure that each of its fund offering documents is kept up to date, consistent with its other fund offering documents and contains all material disclosures that may be required in order for the fund investor to be able to make an informed investment decision.
    • Full and accurate disclosure is particularly important in light of Sergeants Benevolent Assn. Annuity Fund v. Renck, 2005 NY Slip op. 04460, a recent New York Appellate Court decision, where the court held that officers of an investment adviser could be personally liable for the losses suffered by a fund that they advised if they breached their implied fiduciary duties to the fund.  The fiduciary nature of an investment advisory relationship and the standard for fiduciaries under the Advisers Act includes an affirmative duty of utmost good faith, and full and fair disclosure of all material facts, and an affirmative obligation to use reasonable care to avoid misleading clients.
    • Accordingly, it may be an appropriate time for an Investment Adviser to review its offering materials and confirm whether or not any updates or amendments are necessary.  In particular, an Investment Adviser should take into account the impact of the recent turbulent market conditions on its fund(s) and review its fund(s)’ current investment objectives and strategies, valuation practices, performance statistics, redemption or withdrawal policies and risk factors (including disclosures regarding market volatility and counterparty risk), its current personnel, service providers and any relevant legal or regulatory developments.
  • Blue Sky Filings/Form D.  Many state securities “blue sky” filings expire on a periodic basis and must be renewed.  Accordingly, now may be a good time for an Investment Adviser to review the blue-sky filings for its fund(s) to determine whether any updated filings or additional filings are necessary.  We note that as of 2009, all Form D filings for continuous offerings will need to be amended on an annual basis.
  • Liability Insurance.  Due to an environment of increasing investor lawsuits and regulatory scrutiny of fund managers, an Investment Adviser may want to consider obtaining management liability insurance or review the adequacy of any existing coverage, as applicable.

If you have any questions regarding the summary above, please feel free to contact us.

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Bloomberg reports that the SEC is engaged in a probe of investment advisers who invest client assets in hedge funds, funds of funds, private equity, venture capital and other alternative investments. The SEC’s Office of Compliance Inspections and Examinations has recently requested that advisers provide extensive information about their alternative investments, particularly in regards to the due diligence processes used when evaluating alternative investments. A copy of the letter sent by the OCIE to examined advisers and the accompanying information request list is available here.

“This is further evidence of the SEC’s more proactive approach to the hedge-fund industry,” said Jay Gould, a partner at Pillsbury Winthrop Shaw Pittman LLP in San Francisco. “Hedge-fund managers, including funds of funds, can expect the agency to take a greater interest in their policies, practices and their relationships with investors and other fund managers.”

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As we have previously discussed here, the Securities and Exchange Commission adopted significant changes to Part 2 of Form ADV. Among other things, the new Part 2 requires greatly expanded disclosure presented in a narrative, plain English format. The California Department of Corporations has now also adopted the new Part 2, effective October 12, 2010, thereby subjecting California-registered investment advisers to these same disclosure requirements. Compliance dates for California investment advisers are as follows:

  • As of January 1, 2011 all new investment adviser applicants will have to file the new Part 2 of Form ADV as part of their application.
  • As of January 1, 2011 all licensed investment advisers will need to incorporate the new Part 2 of Form ADV with their next filing of an amendment to Form ADV, or their annual updating amendment to Form ADV.
  • Between October 12, 2010 and January 1, 2011 applicants and currently licensed investment advisers filing amendments to their Part II of Form ADV may use either the current Part II or the new Part 2.
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On July 21, 2010, the Securities and Exchange Commission voted to adopt changes to Part 2 of Form ADV (commonly referred to as the “brochure”), which is the principal disclosure document provided by SEC-registered investment advisers to their clients. SEC Chairman Mary Shapiro described the changes as being necessary to ensure that the information most relevant to clients is included in the brochure and that such information is presented in a way that is accessible to investors.

The amendments drastically alter both the form and content of Part 2. The principal changes are to require:

  • Narrative, plain English disclosure. Part 2 previously required advisers to respond to a series of multiple-choice and fill-in-the-blank questions organized in a “check-the-box” format.  The revised Part 2 directs advisers to provide a narrative brochure written in plain English. Advisers are to tailor the presentation of their disclosure to their clients’ level of financial sophistication, employ clear, concise language, use examples and otherwise seek to ensure that material information is effectively communicated to clients.
  • Expanded disclosure. The amended Part 2 requires advisers to discuss more topics and provide more detailed disclosure regarding their business and employees, particularly in regards to any arrangements that may give rise to conflicts of interest. In addition to the information explicitly required to be disclosed in Part 2, advisers have a fiduciary duty to provide clients with all material information regarding the advisory relationship. Such disclosure may be included in Part 2 or disclosed to clients by some other means.
  • Public accessibility. Part 2A of Form ADV must be filed electronically and will be publicly available on the SEC’s website.

Advisers with a fiscal year end of December 31, 2010 must file an annual updating amendment with the new brochures no later than March 31, 2011. Given the need to provide greatly expanded and more individually tailored disclosure, investment advisers should anticipate that their next annual update will be a much more time and resource intensive exercise and involve the creation of a new, comprehensive disclosure document. Accordingly, they should begin their preparations, including discussions with outside counsel, well in advance of their filing deadline.

The revised Part 2 consists of two sub-parts: Part 2A (the “brochure”), which contains 18 disclosure items about the advisory firm, and Part 2B (the “brochure supplement”), which provides information about certain advisory personnel.

Part 2A – The Brochure

Content

Part 2A requires advisers to create narrative brochures responding to the following 18 separate disclosure items.

Item 1. Cover Page. The adviser must disclose on the cover page of its brochure the name of the firm, its business address, contact information, website (if applicable) and the date of the brochure. The brochure must also include a statement that the brochure has not been approved by the SEC or any state regulator.

Item 2. Material Changes. An adviser amending its brochure must identify and discuss the material changes since the last annual update. This information must be provided on the cover page, the page immediately following the cover page, or in a separate document accompanying the brochure.

Item 3. Table of Contents. The brochure must include a table of contents detailed enough to permit clients and prospective clients to locate topics easily.  Advisers must present information in the same order and under same headings as listed in Part 2A of Form ADV.

Item 4. Advisory Business. Item 4 requires each adviser to describe its advisory business, including how long it has been in business and the types of advisory services it offers. If an adviser offers substantially different types of advisory services, it can choose to prepare separate brochures so long as each client receives all applicable information about services and fees.

An adviser must also disclose the amount of client assets under its management. For the purpose of calculating the amount of assets under management for this Item, the adviser may use a method that differs from the method used to report assets under management in Part 1A of Form ADV.  Advisers must update the amount of assets under management annually (as part of their annual updating amendment) and make interim amendments only for material changes in assets under management when they are filing an “other than annual amendment” for a separate reason.

Item 5. Fees and Compensation. An adviser must describe in its brochure how it is compensated for advisory services, provide a fee schedule, and disclose whether fees are negotiable.  Adviser may omit providing fee schedules to clients who are “qualified purchasers,” as defined under the Investment Company Act of 1940.

Item 5 also requires advisers to disclose any compensation they or their personnel receive that is attributable to the sale of a security or other investment product (e.g., brokerage commissions), discuss the conflicts of interest such compensation creates and describe how the adviser addresses these conflicts. Advisers must also disclose that the client may purchase the same security or investment product from a broker that is not affiliated with the adviser.

Item 6. Performance-Based Fees. An adviser that charges performance-based fees must disclose this fact.  If an adviser manages both accounts that are charged a performance-based fee and accounts that are charged another type of fee, the adviser must discuss the conflicts of interest that arise from its simultaneous management of these accounts, including its incentive to favor the accounts it charges a performance-based fee, and describe how it addresses these conflicts.

Item 7. Types of Clients. Item 7 requires advisers to describe the types of advisory clients they have and any requirements they impose on opening or maintaining an account, such as minimum account size.

Item 8. Methods of Analysis, Investment Strategies and Risk of Loss. Item 8 requires advisers to describe their methods of analysis and investment strategies and the material risks involved for each significant investment strategy or method of analysis. If an adviser’s primary strategy involves frequent trading of securities, the adviser must explain how frequent trading can affect investment performance.

Item 9. Disciplinary Information. An adviser must disclose any legal or disciplinary event that is material to a client’s or prospective client’s evaluation of the integrity of the adviser or its management personnel. The Instructions to Item 9 contain a non-exclusive list of disciplinary events presumed to be material if they incurred in the previous 10 years. The list includes convictions for theft, fraud, bribery, perjury, forgery, counterfeiting, extortion and violations of securities laws.

Item 10. Other Financial Industry Activities and Affiliations. Each adviser must describe material relationships or arrangements the adviser (or any of its management personnel) has with related financial industry participants, any material conflicts of interest these relationships or arrangement create, and how the adviser addresses these conflicts.

Item 11. Code of Ethics, Participation in Client Transactions and Personal Trading. Item 11 requires advisers to describe their codes of ethics and state that a copy is available upon request. If the adviser or a related person recommends to clients, or buys or sells for client accounts, securities in which the adviser or a related person has a material financial interest, the adviser must describe this practice and the conflicts of interest presented. Items 11.C and 11.D require disclosure of personal trading by the adviser and its personnel in securities that the adviser or a related person recommends to clients.

Item 12. Brokerage Practices. Item 12 requires advisers to describe their practices regarding soft dollars, client referrals, directed brokerage and trade aggregation and discuss the conflicts of interest resulting from such practices.

Item 13. Review of Accounts. An adviser must disclose whether it reviews client accounts and, if so, the frequency of such reviews.

Item 14. Client Referrals and Other Compensation. Item 14 requires advisers to describe any arrangement under which they or a related person compensates another for client referrals, any conflicts of interest arising from such arrangement and how the adviser addresses these conflicts of interest. The brochure must also disclose any arrangement under which the adviser receives any economic benefit from a person who is not a client for providing advisory services to clients.

Item 15. Custody. Item 15 requires an adviser with custody of client funds or securities to explain in its brochure that clients will receive account statements directly from the qualified custodian. Advisers must also explain to clients that they should carefully review the account statements they receive from the qualified custodian. In addition, if an adviser also sends clients account statements, the adviser’s explanation must include a statement urging clients to compare the account statements they receive from the qualified custodian with those they receive from the adviser.

Item 16. Investment Discretion. An adviser must disclose if it has discretionary authority over client accounts and any limitations clients may place on this authority.

Item 17. Voting Client Securities. Advisers must disclose whether they have or will accept authority to vote client securities and, if so, describe the voting policies they have adopted. Each adviser must describe whether (and how) clients can direct it to vote in a particular solicitation, how the adviser addresses conflicts of interest when it votes securities, and how clients can obtain information from the adviser on how the adviser voted their securities. Advisers that do not accept authority to vote securities must disclose how clients receive their proxies and other solicitations.

Item 18. Financial Information. This item requires disclosure of any financial condition reasonably likely to impair the adviser’s ability to meet contractual commitments to clients. An adviser that requires prepayment of fees must give clients an audited balance sheet showing the adviser’s assets and liabilities at the end of its most recent fiscal year.

Appendix 1. The Wrap Fee Program Wrap. Advisers that sponsor wrap fee programs continue to be required to prepare a separate, specialized firm brochure for clients of the wrap fee program in lieu of the sponsor’s standard brochure.

Delivery

Initial Delivery. Advisers must deliver a current brochure before or at the time of entering into an advisory contract with a client. Advisers are not required to deliver brochures to clients who (i) receive only impersonal investment advice and are charged less than $500 in adviser fees per year; (ii) are investment companies registered under the Investment Company Act; or (iii) are business development companies subject to Section 15(c) of the Investment Company Act.

Annual Delivery. Advisers must annually provide to each client to whom they must deliver a brochure either: (i) a copy of the current (updated) brochure that includes or is accompanied by the summary of material changes; or (ii) a summary of material changes that includes an offer to provide a copy of the current brochure. Each adviser must make this annual delivery no later than 120 days after the end of its fiscal year.

Interim Delivery. Advisers must deliver an updated brochure (or a document describing the material facts relating to the amended disciplinary event) promptly whenever the adviser amends its brochure to add a disciplinary event or to change material information already disclosed in response to Item 9 of Part 2A.

Updating

Advisers are required to keep their brochures current by updating them at least annually, and updating them promptly when any information in the brochures (except the summary of material changes and the amount of assets under management, which only has to be updated annually) becomes materially inaccurate.

Filing

Brochures must be filed with the SEC electronically through the Investment Adviser Registration Depository system. Although previously filed versions of an adviser’s brochure will remain in the IARD system, only the most recent version will be publicly accessible through the SEC’s website.

Part 2B – The Brochure Supplement

Each brochure must be accompanied by brochure supplements providing information about the officers, partners, directors and employees of the adviser who provide investment advice (collectively, “supervised persons”). Specifically, advisers are required to provide a client with a brochure supplement for each supervised person who: (i) formulates investment advice for that client and has direct client contact; or (ii) makes discretionary investment decisions for that client’s assets. If investment advice is provided by a team comprised of more than five supervised persons, brochure supplements need only be provided for the five supervised persons with the most significant responsibility for the day-to-day advice provided to the client.

Content

Item 1. Cover Page. The cover page must include information identifying the supervised person covered by the supplement and the advisory firm.

Item 2. Educational Background and Business Experience. Item 2 requires the adviser to describe the supervised person’s formal education and his or her business background for the past five years. The business background section must identify the supervised person’s positions at prior employers and not merely list the names of prior employers.  If professional designations are disclosed in the supplement, the supplement must also provide a sufficient explanation of the minimum qualifications required for the designation to allow clients and potential clients to understand the value of the designation.

Item 3. Disciplinary Information. Item 3 requires disclosure of any legal or disciplinary event that is material to a client’s evaluation of the supervised person’s integrity. It includes certain disciplinary events that the SEC presumes are material to such an evaluation if they occurred during the last 10 years.

Item 4. Other Business Activities. Item 4 requires an adviser to describe other business activities of its supervised persons. The adviser must disclose other capacities in which the supervised person participates in any investment-related business, any compensation the supervised person receives based on the sales of securities or other investment products, and any material conflicts of interest such participation or compensation may create. The brochure supplement must also disclose other business activities or occupations that the supervised person engages in if they involve a substantial amount of time or pay. Business activities representing less than 10 percent of the supervised person’s time and income are presumed not to be substantial.

Item 5. Additional Compensation. This item describes arrangements in which someone other than a client gives the supervised person an economic benefit (such as a sales award or other prize) for providing advisory services.

Item 6. Supervision. This item requires an adviser to explain how the firm monitors the advice provided by the supervised person addressed in the brochure supplement. It also requires a firm to provide the client with the name, title, and telephone number of the person responsible for supervising the advisory activities of the supervised person.

Delivery

The supervised person’s supplement initially must be given to each client at or before the time when that specific supervised person begins to provide advisory services to that specific client.

Advisers are not required to deliver supplements to three types of clients: (i) clients to whom an adviser is not required to deliver a firm brochure (e.g., registered investment companies and business development companies); (ii) clients who receive only impersonal investment advice; and (iii) certain officers, directors, employees and other persons related to the adviser.

Updating

Advisers must deliver an updated supplement to clients only when there is new disclosure of a disciplinary event, or a material change to disciplinary information already disclosed, in response to Item 3 of Part 2B. As with the brochure, advisers must amend a brochure supplement promptly if information in it becomes materially inaccurate. Any new clients to whom the adviser is obligated to deliver a supplement must be given an amended supplement (or the “old” supplement and a sticker). Advisers are not required to deliver supplements to existing clients annually.

Filing

Advisers are not required to file brochure supplements or supplement amendments with the SEC, and they will not be available on the SEC’s public website. Advisers are required to maintain copies of all supplements and amendments in their files.

Compliance Dates

New Advisers

Advisers registering with the SEC after January 1, 2011 must file a brochure meeting the requirements of amended Part 2A and, upon registering, begin to deliver a brochure and brochure supplements to clients and prospective clients in accordance with the requirements discussed above.

Registered Advisers

Each adviser currently registered with the SEC whose fiscal year ends on or after December 31, 2010 must include in its next annual updating amendment to its Form ADV a brochure that meets the requirements of the amended form. Accordingly, each adviser with a fiscal year end of December 31, 2010 must file an annual updating amendment with the new brochures no later than March 31, 2011. Within 60 days of filing such amendment, the adviser must deliver to its existing clients a brochure and brochure supplement that meet the requirements of amended Form ADV. Each adviser must, after the initial filing of the brochures, begin to deliver to new clients and prospective clients a new brochure and brochure supplements satisfying the requirements discussed above.