The events of 2008 and 2009, including the publicity surrounding

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1 Effective Disclosure of Investment Adviser Conflicts Now More Important Than Ever By George T. Lee, III and Jon R. Rafpor George T. Lee III is a partner and co-founder of Lee & Stone LLP. He represents leading investment advisors, hedge funds, private equity funds, venture capital funds and family offices. His practice includes advising clients on forming, structuring and launching their businesses.* Jon R. Rafpor is an associate at Lee & Stone LLP. He represents private equity and hedge fund managers on a range of transactions, with a particular focus on structuring, formation and launch of investment vehicles, marketing activities and regulatory compliance related matters.** The events of 2008 and 2009, including the publicity surrounding the frauds perpetrated by Allen Stanford and Bernie Madoff, caused investors, Congress, the SEC and other regulators to focus on conflicts of interest in the investment adviser/ client relationship. Much of the Dodd-Frank legislation, as well as regulations recently adopted by the SEC and other regulators, have been a direct result of this renewed attention to conflicts of interest. In fact, the conflict of interest disclosures required as part of the new Form ADV brochure are perhaps the best example of this new paradigm as well as the best means to address and manage conflicts of interest. This article will discuss: The legal framework governing investment adviser conflicts of interest; How to identify conflicts of interest; How to effectively disclose conflicts of interest to clients in your Form ADV brochure and elsewhere; and Tips for investment advisers and CCOs to implement as part of their compliance programs for disclosing, managing, and, where possible, avoiding conflicts of interest altogether. Legal Framework Common Law Above all else, an investment adviser is a fiduciary with a duty of undivided loyalty to its clients. 1 This duty includes the obligation to (1) avoid conflicts of interest where possible, (2) disclose all conflicts that cannot be avoided, and (3) in some cases, get the consent of the client before entering into a transaction or an activity that could create a conflict of interest. Agency law imposes this duty of loyalty as an agent, the adviser is a fiduciary of the client. The cornerstone principle arising from the adviser s fiduciary duty is that an investment adviser must not act for 2012, George T. Lee III and Jon R. Rafpor PRACTICAL COMPLIANCE & RISK MANAGEMENT FOR THE SECURITIES INDUSTRY MAY JUNE

2 competing interests either another party s or the investment adviser s own in a transaction connected with the advisory relationship. Nevertheless, the common law recognizes that an adviser may modify its duty of loyalty by providing clients with full disclosure of all material facts that could reasonably affect the client s judgment, and in some cases, by obtaining the client s informed consent prior to entering into the transaction. A conflict of interest can be defined as a practice or relationship in which the interests of an investment adviser compete with the interests of its client. A conflict is material if a reasonable person would consider the conflict important in making a decision to (1) engage the adviser, (2) permit a transaction or other activity involving the client s account, or (3) continue or terminate the engagement. It is important to keep in mind that not all conflicts of interest are illegal or even harmful if fully disclosed and understood by the client. Some conflicts are inherent in the adviser/client relationship and cannot be avoided, nor should they be. For example, at the most basic level, the charging of a fee for advice creates a conflict of interest. The natural interest of the adviser is to receive the highest compensation possible for its services. The interest of the client is to get the best advice for the lowest possible fee. In this situation, the conflict is mitigated by disclosing all fees and ensuring that the client understands the fees and has consented to them. Advisers Act The Investment Advisers Act of 1940 (the Advisers Act ) reflects Congress recognition of the fiduciary nature of the investment advisory relationship, as well as its intent to eliminate, or at least to expose, all confl icts of interest which might incline an investment adviser consciously or unconsciously to render advice which was not disinterested. 2 In many instances, the Advisers Act incorporates various common law fiduciary rules or alternatively, modifies the common law rules to fit within the investment advisory context. For example, the Advisers Act prohibits a client from waiving an adviser s duty to disclose, whereas common law would allow such a waiver. In addition, the Advisers Act requires the adviser to make full and fair disclosure to both existing and prospective clients, which common law would not require. Thus, under a common-law inspired framework, the Advisers Act imposes a duty on investment advisers to avoid putting themselves in conflict with the interests of the client or, if they cannot do so, to make full and fair disclosure, and, where necessary, obtain the client s informed consent. The U.S. Supreme Court has held that an investment adviser s failure to disclose a conflict of interest, even in the absence of intent, can constitute fraud under the Advisers Act. 3 Section 206 of the Advisers Act is the general anti-fraud provision. A Section 206 violation may be based on either an affirmative misstatement of, or the failure to disclose, material information. 4 The general requirements of Section 206 impose specific disclosure obligations on investment advisers whose activities and/or transactions involve potential conflicts of interest. There are some practices that require not only full and clear disclosure, but also prior investor consent to each specific transaction or affiliation. For example, Section 206(3) prohibits principal transactions and agency cross transactions without informed consent from the client. Furthermore some practices, including scalping and front-running, are strictly prohibited and may subject the investment adviser to both civil and criminal liability for fraud and/or insider trading under Section 204A and/or SEC Rule 10b-5. Rule 206(4)-5 (the Pay to Play Rule ) is an example of the SEC s renewed focus on conflicts of interest that cannot be consented to. The Pay to Play Rule is intended to prevent an investment adviser from making political donations in return for receiving government clients or investments from government entities. Generally, the rule prohibits an investment adviser from: providing advisory services for compensation to a government entity for two years after the adviser or certain of its personnel make a contribution to certain elected officials or candidates; providing payments to third parties for soliciting advisory business from any government entity, unless the solicitor is a registered brokerdealer or registered investment adviser; and soliciting contributions to certain elected officials or candidates or payments to political parties where the adviser is providing or seeking government business. 14 MAY JUNE 2012 PRACTICAL COMPLIANCE & RISK MANAGEMENT FOR THE SECURITIES INDUSTRY

3 The Form ADV Part 2 Brochure and Brochure Supplement In 2010, the Securities and Exchange Commission adopted the new narrative disclosure requirements of Part 2 of Form ADV to replace the old checkthe-box format. 5 Rule under the Advisers Act (the Brochure Rule ) requires investment advisers to deliver a brochure and one or more brochure supplements to each client or prospective client that contains all information required by Part 2 of Form ADV. The ADV brochure is the primary disclosure document under the Advisers Act. The recent changes to the Brochure Rule illustrate the SEC s shift away from a basic disclosure regime to one that requires the adviser to be proactive in indentifying specific conflicts of interest and disclosing how they will manage them. By requiring specific disclosure of the steps that the adviser is taking to address conflicts, the SEC is emphasizing its expectation that investment advisers not only disclose conflicts but also actively manage them. The amendments are designed to provide prospective clients with clearly written, meaningful, current disclosure of the business practices, conflicts of interest and background of investment advisers and their advisory personnel. 6 Employee Retirement Income Security Act The Employee Retirement Income Security Act of 1974 ( ERISA ) takes a much more restrictive approach to conflicts of interest than does the Advisers Act. Rather than relying on a system that requires disclosure and informed consent, for the most part, ERISA prohibits transactions that could give rise to conflicts. For example, Section 406(a)(1)(C) of ERISA broadly prohibits the provision of goods, services, or facilities between a plan and a party in interest to the plan. An investment adviser to an ERISA plan would be a party in interest, and therefore an investment management arrangement between the plan and the investment adviser, even if necessary and beneficial to the plan, would, absent an exemption, violate ERISA section 406(a)(1)(C). Fortunately, ERISA Section 408(b)(2) provides an exemption to this prohibition for agreements, including investment management agreements, if: the agreement is reasonable; the services are necessary for the establishment or operation of the plan; and no more than reasonable compensation is paid for the services. Even though the ERISA statute does not specifically address disclosure of conflicts of interest, the Department of Labor (the DOL ) takes the position that a contract or arrangement with an ERISA plan is not reasonable unless there is sufficient disclosure to allow the plan sponsor to assess the reasonableness of the compensation to be received by the service provider and the conflicts [An investment adviser s fiduciary] duty includes the obligation to (1) avoid conflicts of interest where possible, (2) disclose all conflicts that cannot be avoided, and (3) in some cases, get the consent of the client before entering into a transaction or an activity that could create a conflict of interest. of interest that may affect the service provider s performance. In other words, an agreement to provide investment management services to an ERISA plan would be a prohibited transaction unless the plan sponsor is able to determine that the compensation to be received by the adviser is reasonable. The DOL originally issued proposed rules requiring service providers to ERISA plans to make certain disclosures in The original proposal would have required disclosures of specific types of conflicts of interest. The proposed rules were substantially amended in an interim final rule issued by the DOL on July 16, 2010, which eliminated the requirement for disclosure of specific conflicts, and relied instead on fuller disclosure of the circumstances under which the service provider is compensated by third parties. The interim final rule was originally scheduled to be effective on July 16, 2011, but the effective date was delayed. Finally, on February 3, 2012, the DOL issued a final rule amending its regulations under Section 408(b)(2) (the Fee Disclosure Rule ), substantially in the same form as the interim final rule. 7 The Fee Disclosure Rule has an effective date of PRACTICAL COMPLIANCE & RISK MANAGEMENT FOR THE SECURITIES INDUSTRY MAY JUNE

4 July 1, 2012, which means that prior to the effective date, investment advisers must provide the required disclosures to the sponsors of each ERISA plan to which they provide services. The Fee Disclosure Rule provides that a contract or arrangement for services between a covered plan and a covered service provider is not reasonable within the meaning of section 408(b)(2) unless the service provider makes the disclosures required by the Fee Disclosure Rule to the plan sponsor or other responsible plan fiduciary. Under the rule, an investment adviser must disclose: the adviser s status as an ERISA fiduciary to the plan; the adviser s status as a state or SEC registered investment adviser; the services it will provide to the plan; and the direct compensation it and its affiliates will receive from the plan; the indirect compensation it or its affiliates will receive from other sources in connection with its services to the plan. The indirect compensation disclosures must describe both monetary and non-monetary benefits that investment advisers or their affiliates receive from parties other than the plan, including fees received by the investment adviser s third-party affiliates. The Fee Disclosure Rule requires an investment adviser to identify not only the payer of the indirect compensation, but also describe the arrangement between the payer of the indirect compensation and the investment adviser, pursuant to which such indirect compensation is paid. The investment adviser must describe its arrangement with the payer of the indirect compensation so that the plan sponsor can analyze why the payer is compensating the investment adviser in connection with the investment adviser s services to the plan. The DOL is concerned that an investment adviser may award necessary transactions to its affiliates or to third parties (such as a broker-dealer) based on the adviser s receipt of benefits (such as soft dollars) rather than on the best interests of the plan. Unlike the SEC s Brochure Rule, the DOL s Fee Disclosure Rule does not require service providers to make disclosures in any specific format or on a specified form. The DOL has indicated that in the future it will publish a guide or similar requirement with respect to disclosures under the Fee Disclosure Rule. Furthermore, the DOL did include an optional summary guide for use in complying with the disclosure rules in the Federal Register as an appendix to the Fee Disclosure Rule. 8 Nevertheless, investment advisers may incorporate their ERISA disclosures into their Form ADV Brochure and the DOL has blessed this practice. How to Identify Conflicts of Interest Given the breadth of the conflicts specifically identified in the Advisers Act, SEC Rules, Form ADV, and ERISA regulations, investment advisers and their CCOs may feel confident that simply disclosing the types of conflicts indentified in the various regulations will satisfy their fiduciary duty to their clients. Despite the seemingly comprehensive range of disclosure requirements under the Advisers Act and ERISA, advisers should use them as a starting point, not a finish line. 9 After all, not all conflicts of interest identified in Form ADV may apply and other conflicts not identified may apply. Disclosure must be tailored to the adviser. In light of the inherent fiduciary nature of the financial advisory relationship, the key to recognizing potential conflicts of interest is to follow the money. In other words, the adviser must consider all sources of its compensation (e.g. fee differentials, performance fees, compensation from third-parties, compensation to affiliates, soft dollars, gifts, gratuities) to see whether any of it comes at the expense of, or compromises, a client s interest or objective. Advisers and CCOs can also identify conflicts by staying current on changes in the law through sources such as SEC commissioner and staff speeches and pronouncements, enforcement actions, and administrative releases. CCOs should always be mindful of changes to client relationships, new and/or competing investment-products, family relationships, and past client complaints. Effective Disclosure Recent changes in the regulatory landscape reflect Congress and the SEC s intention to enhance investor confidence by promoting an atmosphere of full and useful disclosure. For example, the SEC s new ADV Brochure Rule is intended to ensure that the information is conveyed effectively so that that investors fully understand the nature of the risks associated with a particular investment adviser, its 16 MAY JUNE 2012 PRACTICAL COMPLIANCE & RISK MANAGEMENT FOR THE SECURITIES INDUSTRY

5 business practices and its investment strategies. To this end, it is essential that clients and prospective clients receive disclosure that they are likely to read and understand. 10 Part 2 of Form ADV is designed to require investment advisers to provide clients with simple and clear disclosure, in plain English, about the investment adviser s qualifications, business practices and conflicts of interest. Plain English means: short sentences; definite, concrete, everyday words; active voice; tables or bullets for complex material; avoiding legal jargon or highly technical business terms; and avoiding multiple negatives. Part 2A of Form ADV itemizes a list of important disclosures many of them relating to conflicts of interest that investment advisers are expected to include in their client brochures. The items concerning conflicts of interest require the adviser to describe specific activity that creates the conflict, explain how it creates a conflict between the client and another party, and describe what the adviser does to manage the conflict. Investment advisers have the ultimate responsibility for ensuring that their brochures accurately refl ect their business practices and assessment of conflicts of interest. The following is a discussion of the most important Part 2A Items that require disclosure of conflicts of interest. Item 5 Fees and Compensation. Item 5 requires an adviser to disclose any conflict of interest arising from benefits the adviser receives in connection with the sale of securities to a client and the manner in which the adviser addresses the conflict. For example, an investment adviser that uses an affiliated broker-dealer is required to disclose that doing so may incentivize the adviser to trade client securities based on the compensation to the adviser s affiliate rather than on the best interests of the client. Item 6 Performance-Based Fees and Side- By-Side Management. Item 6 requires an adviser that charges performance-based fees to disclose this fact and the conflicts it could create. For example, a performance-based fee could cause the adviser to make riskier investment decisions because the adviser does not share with its client the downside risk of investing in securities. Item 6 also requires that an adviser managing both performance-based fee and non-performance fee accounts to discuss the conflicts of interest that arise from such simultaneous management. Side-by-side management of a performance-based fee account and one that does not charge such fees creates an incentive for the investment adviser to favor performancebased accounts over accounts that do not earn a performance-based fee in order to generate larger compensation. Item 10 Other Financial Industry Activities and Affiliations. Item 10 requires an adviser to describe material relationships or arrangements it has with affiliated financial industry persons, any material conflicts of interest these affiliations create, and how the adviser addresses the conflicts. Item 10 also requires that an adviser who refers clients to another adviser to disclose any compensation agreements between the advisory firms, the conflicts created by the agreement, and the way it addresses the conflicts. Item 11 Code of Ethics, Participation or Interest in Client Transactions and Personal Trading. Item 11 requires an adviser to disclose its participation or interest in client transactions such as recommending that clients invest in a fund for which the adviser serves as the general partner the nature of the conflicts, and the way the adviser addresses the conflicts. Item 11 also requires an adviser to disclose whether it invests in the same securities it recommends to its client, the conflict of interest it presents, and how the adviser mitigates the conflict. Conflicts of interest could arise if for example, an adviser invests, or is already invested, in securities that it recommends to its clients because of the effect the adviser s investment position would have on the objectivity of its advice. Item 11 may also serve as a catch-all for disclosing miscellaneous conflicts that do not otherwise fall within the scope of Form ADV but should nevertheless be disclosed as part of of the adviser s fiduciary duty to do so. Item 12 Brokerage Practices. Item 12 requires an adviser to disclose brokerage practices including soft dollar benefi ts received in connection with client securities transactions, compensation paid to broker-dealers for client referrals, the conflicts associated with permitting a client to direct brokerage, and whether and under what conditions the adviser aggregates trades. As with the other Items, the adviser must also describe how each practice creates a conflict of interest PRACTICAL COMPLIANCE & RISK MANAGEMENT FOR THE SECURITIES INDUSTRY MAY JUNE

6 Xxxxx Xxxxxx xx Effective Disclosure of Investment Adviser Conflicts Now More Important Than Ever It is important to keep in mind that not all conflicts of interest are illegal or even harmful if fully disclosed and understood by the client. and the procedures the adviser uses to mitigate the conflicts. For example, by receiving soft dollar benefits, the adviser may have an incentive to select broker-dealers based on those benefits rather than the best interests of the client (such as keeping transactions costs down). Soft dollar benefits that do not fall under the safe harbor of Exchange Act Section 28(e) 11 require a more detailed disclosure. Additionally, investment advisers that select or recommend broker-dealers in return for client referrals must disclose the incentive to direct brokerage to these broker-dealers on the basis of the business they refer to the adviser instead of the best interest of the clients. Item 14 Client Referrals and Other Compensation. Item 14 requires an adviser to disclose any arrangement under which it compensates a third party for client referrals. In addition, the adviser must also describe the compensation, the conflicts of interest that arise from the arrangement, and how the adviser manages the conflict. Item 17 Voting Client Securities. Item 17 requires an adviser that accepts authority to vote client securities to describe its voting policies under Rule 206(4)-6, whether and how clients can direct it to vote, how the adviser addresses any conflicts that arise when it votes, and how clients can access information from the adviser on how it voted their securities. If the adviser does not accept authority to vote securities, the adviser must disclose how clients may receive their proxies and other solicitations. Part 2A Appendix 1: The Wrap Fee Program Brochure. Appendix 1 requires advisers that sponsor wrap fee programs to prepare a brochure containing the same items as Part 2A for clients of the wrap free program. Appendix 1 has an additional provision requiring the adviser to disclose whether any of its related persons is a portfolio manager in the wrap fee program and, if so, to describe the associated conflicts of interest. The adviser may have an incentive to select an affiliated person to serve as portfolio manager based on the person s relationship with the adviser, rather than based on expertise or performance. Part 2B Brochure Supplement Part 2B supplements the disclosure brochure by providing information about the adviser s personnel on whom the specific client receiving the brochure relies for advice. The supplement contains six items containing information about the educational background, business experience, and disciplinary history (if any) of the supervised persons who provide advisory services to the client. Item 4 of Part 2B requires the adviser to disclose any investment-related business or occupation in which a supervised person is actively engaged, whether such financial-industry activities create material conflicts of interest, and how the adviser addresses those conflicts. Item 4 also requires the adviser to disclose any compensation the supervised person receives based on the sale of securities or other investment products, along with an explanation of the conflicts it creates. Such compensation can create an incentive for the supervised person to base investment advice on his or her own pecuniary interest rather than on the clients best interests. Finally, Item 4 of Part 2B requires the adviser to disclose other business activities or occupations of supervised persons if they involve a substantial amount of time or pay. Tips for Disclosing Conflicts of Interest Don t Just Rely on the Specific Disclosure Requirements of Form ADV As mentioned above, Form ADV does not address every possible conflict. In fact, the General Instructions to Part 2 of Form ADV note that the adviser may have to disclose information not specifically required by Part 2, or in more detail than the brochure items might otherwise require, in order to fulfill the adviser s statutory duty. 12 The instructions recommend additional disclosure via the brochure or by some other means. Despite being the primary document for disclosing conflicts, the Form ADV Brochure is not the only effective vehicle for delivering disclosures to clients. Indeed, many investment advisers rely on other documents to supplement their Form ADV disclosure. Investment advisory agreements are 18 MAY JUNE 2012 PRACTICAL COMPLIANCE & RISK MANAGEMENT FOR THE SECURITIES INDUSTRY

7 increasingly used to disclose conflicts of interest and obtain consent for practices that require it. Fund offering documents confi dential offering memoranda, prospectuses, and statements of additional information contain disclosure of the various risks associated with investing in the particular types of investment or investment program offered by pooled investment vehicles. Finally, responses to due diligence questionnaires and other inquiries and proposals from both current and prospective clients may be used to convey how investment advisers identify, monitor, and mitigate conflicts. Communicate Using a Layered Approach Despite the time and effort that go into disclosure documents, clients may not read them or understand them if they do. A layered approach may help. For example, advisers with extensive disclosure documents should incorporate an introductory summary of disclosure, no longer than one page, to ensure that clients become at least aware of the conflicts that may arise over the course of the advisory relationship. Another way to alleviate this problem is to disclose conflicts through varying outlets with more detail on request. For example, a potential conflict could be disclosed to a client at the first meeting and then followed up with more specific information delivered to the client either in paper or by . Cooling Off Many commentators support the concept of a cooling-off period that separates transactions from immediate advice. This allows investors to make informed decisions away from actual or perceived pressure from the adviser. Ironically, the SEC eliminated the requirement that the ADV Brochure be delivered at least 48 hours before entering into the advisory contract, or at the time of entering into the contract if the client had the right to terminate the contract without penalty within five business days thereafter. Rule now only requires the adviser to deliver its disclosure statement before or at the time it enters into the advisory contract with the client. 13 Many state regulations still require the coolingoff period and it makes sense to incorporate it in your advisory agreement regardless of whether it is required. Create a Conflicts Matrix As part of an investment adviser s required compliance program, matrices of confl icts and their associated risks should be used to inventory the various relevant disclosures and/or consent procedures for each conflict. Such a matrix should: identify each potential conflict; reference the particular statute or rule that applies to it; state if and where it should be disclosed in your Form ADV brochure; and explain overall policies and procedures in place to mitigate the conflict. The matrix included in the Forms, Templates and Tools section of this issue, along with the one in the July/August 2011 issue of Practical Compliance and Risk Management for the Securities Industry, are good places to start. Along with Testing Policies and Procedures, Test Disclosures Disclosures will need to evolve over time to reflect ever-changing regulatory standards and business practices. Compliance programs should incorporate a disclosure review into the annual testing of policies and procedures. As each policy is tested, the disclosures associated with the subject of each policy should also be reviewed and updated to ensure they remain accurate and effective. Update Disclosures as Needed Notwithstanding the annual updating requirements of Form ADV and the DOL s new regulations under ERISA Section 408(b)(2), investment advisers still have an ongoing fiduciary duty to inform [their] clients of any material information that could affect the advisory relationship. 14 Investment advisers should update and distribute disclosures as they arise, not just by the statutory deadline. Disclosure as Part of a Comprehensive Program Disclosure of conflicts of interests should not be utilized as a stand-alone policy. Disclosure should be one element of a comprehensive program to recognize and mitigate confl icts of interest. An effective program includes a conflicts of interest policy, designated conflicts personnel, a conflicts assessment tailored to recognize specific conflicts associated with the adviser s practice, employee training, and a conflicts monitoring process. PRACTICAL COMPLIANCE & RISK MANAGEMENT FOR THE SECURITIES INDUSTRY MAY JUNE

8 Conclusion As an investment adviser, you are a fiduciary with the duty always to act in the best interest of your clients. Nevertheless, there will be situations where conflicts of interest arise in the adviser/ client relationship that cannot be eliminated. Your duty is to effectively identify, disclose and manage those conflicts so that clients can make fully informed decisions. These steps will improve your relationship with both your clients and your regulators. ENDNOTES * Mr. Lee also represents clients in connection with registration, compliance and regulatory examinations before state and federal regulators, including the SEC and the CFTC. He also works with state and federal regulators on proposed rulemaking and was instrumental in helping shape the SEC s Family Office Exception to regulation under the Dodd-Frank Act. ** Prior to joining Lee & Stone, Mr. Rafpor s legal and business experience focused on the energy sector, including the review of real property and mineral interest conveyances to assist in the calculation of unpaid royalty interests. 1 See In re Arleen Hughes, Exchange Act Release No (Feb. 18, 1948). 2 SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 186 (1963). 3 SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 194 (1963). 4 See generally Investment Advisers Act Sections 206(1)-(2). 5 Amendments to Form ADV, SEC Release No. IA-3060 (July 28, 2010). 6 Amendments to Form ADV, page Fed Reg (Feb. 3, 2012) Fed Reg (Feb. 3, 2012). 9 See Rule 204-3(f): Delivering a brochure or brochure supplement in compliance with this section does not relieve you of any other disclosure obligations you have to your [clients] 10 Amendments to Form ADV, page Section 28(e) provides a safe harbor to investment advisers who use the commission dollars of their advised accounts to obtain investment research and brokerage services, provided that all of the conditions in the section are met. The section states that a person who exercises investment discretion with respect to an account shall not be deemed to have acted unlawfully or to have breached a fiduciary duty under state or federal law solely by reason of his having caused an account to pay more than the lowest available commission if that person determines in good faith that the amount of the commission is reasonable in relation to the value of the brokerage and research services provided. Exchange Act Release No (Apr. 28, 1986). 12 See General Instructions for Part 2 of Form ADV, Instruction Amendments to Form ADV, page Note to Instruction 2 of Instructions for Part 2A of Form ADV. This article is reprinted with permission from Practical Compliance and Risk Management for the Securities Industry, a professional journal published by Wolters Kluwer Financial Services, Inc. This article may not be further re-published without permission from Wolters Kluwer Financial Services, Inc. For more information on this journal or to order a subscription to Practical Compliance and Risk Management for the Securities Industry, go to onlinestore.cch.com and search keywords practical compliance 20 MAY JUNE 2012 PRACTICAL COMPLIANCE & RISK MANAGEMENT FOR THE SECURITIES INDUSTRY