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learning center: publication detail
The New Brochure Rules Adopted by the SEC
Investment Adviser Alert
August 2010
Authors: Patrick D. Sweeney

Investment advisers who are registered or who plan to register with the SEC or with any state regulatory authority face a new era of client disclosure requirements beginning in 2011. Recent SEC rule changes will affect the presentation and content of information that advisers must provide to their clients in a narrative brochure in "plain-English."


The Investment Advisers Act of 1940 (the "Advisers Act") requires each adviser registered with the SEC to deliver written disclosure statements to clients. Part 2 of Form ADV ("Part 2"), which advisers must complete to register, sets out minimum requirements for this disclosure statement.

The SEC has published amendments (the "Amendments") to Part 2 that will affect how advisers must present information to their clients and the type of information they must disclose. In the past, advisers had to respond to multiple-choice and fill-in-the-blank questions organized in a "check-the-box" format, supplemented in some cases with brief, narrative responses. The amended Part 2 will require advisers to complete a narrative brochure in plain English, presenting information in the form's specific order and using headlines that the form provides.

The amended Part 2 will contain two sub-parts, Part 2A and Part 2B. Part 2A includes 18 items that the advisory firm must disclose about itself in the adviser's brochure. Part 2B, referred to as the "brochure supplement," will require advisers to provide information about advisory personnel on whom clients rely for investment advice. The SEC is coordinating the Amendments with the states to accommodate technical, state-specific changes to the disclosure items.

Summary of Part 2A

Part 2A consists of 18 separate items, each covering a disclosure topic:

Item 1. Cover Page. The adviser must include a cover page containing identifying information, including its name, address, contact information and website.

Item 2.  Material Changes. The adviser must provide a summary of material changes in its business.

Item 3.  Table of Contents. The adviser must provide a detailed table of contents to the brochure.

Item 4. Advisory Business. The adviser must provide a description of the adviser's business, including how long the firm has been operating, the identity of the firm's principal officers, the advisory services offered, and total assets under the adviser's management.

Item 5. Fees and Compensation. The adviser must describe how it is compensated for advisory services, provide a fee schedule and disclose whether fees are negotiable. The adviser also must describe other costs, such as brokerage and custody fees and fund expenses that clients must pay in connection with advisory services. An adviser charging fees in advance must explain how it calculates and refunds prepaid fees if a client contract terminates.

Item 6. Performance-Based Fees and Side-By-Side Management. The adviser must disclose whether it takes performance-based fees. If the adviser manages some accounts that are charged performance-based fees and other accounts that are not, the adviser must also discuss how it manages resulting conflicts of interest.

Item 7. Types of Clients. The adviser must describe the types of advisory clients the firm generally has and the requirements for opening an account with the adviser, such as minimum account size.

Item 8. Methods of Analysis, Investment Strategies and Risk of Loss. The adviser must describe its methods of analysis and investment strategies and disclose that investing in securities involves risk of loss. The adviser must also explain the material risks involved for each significant investment strategy or method of analysis.

Item 9. Disciplinary Information. The adviser must disclose material facts about any legal or disciplinary events involving the adviser or its personnel, including convictions for theft, fraud, perjury and securities laws violations if they occurred in the prior 10 years (though certain serious disciplinary events may be deemed to be material even if they occurred more than 10 years ago).  Disclosure of arbitration awards or claims is generally not required.

Item 10. Other Financial Industry Activities and Affiliations. The adviser must describe material relationships or arrangements that the adviser or its managers has with a related financial industry participant, and any resulting material conflicts of interest. If the adviser selects or recommends other advisers for clients, it must disclose compensation arrangements or other business relationships between the firms.

Item 11. Code of Ethics, Participation or Interest in Client Transactions and Personal Trading. The adviser must describe briefly its code of ethics, disclose whether the adviser recommends to clients securities in which the adviser has a material financial interest, and disclose whether the adviser or any advisory personnel invest in the same securities that the adviser recommends to its clients.

Item 12. Brokerage Practices. The adviser must disclose how it selects brokers for client transactions and determines the reasonableness of brokers' compensation. The adviser must also disclose its soft dollar, directed brokerage and trade aggregation practices.

Item 13. Review of Accounts. The adviser must disclose whether, and how often, it reviews clients' accounts or financial plans, and identify who conducts the review.

Item 14. Client Referrals and Other Compensation. The adviser must describe any arrangement under which it or its advisory personnel compensate a third party for client referrals and to describe the compensation. The adviser must also disclose any arrangement under which the adviser receives any economic benefit from non-clients in connection with its advisory services, including sales awards or prizes.

Item 15. Custody. The adviser must disclose if a custodian for client accounts sends a periodic account statement to the adviser's clients and advise clients to review these statements carefully. The adviser must also urge clients to compare custodian account statements with any separate adviser statements.

Item 16. Investment Discretion. The adviser must state whether it has discretionary authority over client accounts, and whether clients have placed (or whether they customarily place) any limitations on that authority.

Item 17. Voting Client Securities. The adviser must disclose its proxy voting practices, including how clients may direct the adviser to vote in particular solicitations, and how the adviser addresses conflicts of interest in its proxy voting activities.

Item 18. Financial Information. The adviser must report certain financial information about its firm. Any adviser that requires prepayment of fees must give clients an audited balance sheet at the end of its most recent fiscal year. The adviser must also disclose any financial conditions likely to impair the adviser's ability to perform under its client contracts.

If the adviser is registering or is registered with one or more state regulatory authorities, it must fill out an additional item (Item 19) relating to specific requirements for state-registered advisers.

Summary of Part 2B

Part 2B of Form ADV, also known as the brochure supplement, requires the adviser to disclose certain information about its "supervised persons,"[1] including educational background, business experience, other business activities, additional compensation (provided by a person other than the adviser in connection with the provision of advisory services) and any disciplinary history. The adviser must also describe how it monitors its supervised persons' services.

Client Delivery and Update Requirements

1.      The adviser must file the brochure electronically with the SEC. There is no filing requirement for the brochure supplement; however, the adviser must keep a copy of each supplement in its records.

2.      The adviser must deliver a copy of the brochure to each advisory client before or at the time the client enters into a contract with the adviser. The adviser must update clients annually with respect to the brochure by providing a summary of material changes to it and offering to provide an updated copy of the brochure upon request.

3.      The adviser must give clients a brochure supplement for each supervised person of the adviser. If a team of individuals comprised of more than five supervised persons provides investment advice, brochure supplements need to be provided only for the five persons with the most significant advisory responsibilities. 

4.      When an adviser's supervised person provides advisory services, the advisor must send a brochure supplement for that person to its clients. The adviser must also update its clients if the supervised person is subject to any disciplinary events, or if there is a material change to disciplinary information already disclosed.

Compliance Timeline

The Amendments will become effective 60 days after their publication in the Federal Register. Registered advisers whose current fiscal year ends December 31, 2010, or later must file with the SEC a brochure that conforms to amended Form ADV within 90 days of the fiscal year end. The adviser must distribute the filed brochure to its clients within 60 days of filing. New advisers applying for registration after January 1, 2011, must file a brochure that meets the new requirements. 

If you have any questions on this Investment Advisor Alert, please contact Pat Sweeney at (212) 592-1547 or

Copyright © 2010 Herrick, Feinstein LLP. Investment Adviser Alert is published by Herrick, Feinstein LLP for information purposes only. Nothing contained herein is intended to serve as legal advice or counsel or as an opinion of the firm.


[1] A "supervised person": (i) formulates investment advice for the adviser's clients and has direct client contact, or (ii) makes discretionary investment decisions for the adviser's clients' assets, even if the person has no direct contact with clients.