February 2011 New Form ADV Part 2 K&L Gates Checklist for Preparation of Parts 2A and 2B
The New Form ADV Part 2 (as of January 31, 2011) On July 2010, the SEC adopted amendments that significantly alter the form and substance of the disclosures on Form ADV. This chart, in the form of a checklist, is intended to assist in the preparation of such disclosures. While we have attempted to provide current and accurate information, please review releases IA-3060 (http://www.sec.gov/rules/final/2010/ia-3060.pdf) and IA-3129 (http://www.sec.gov/rules/final/2010/ia-3129.pdf) for a comprehensive discussion of the Form ADV Part 2 requirements and compliance deadlines. Current Compliance Deadlines: Part 2A of Form ADV: Firm Brochure Newly-registered investment advisers must comply with the requirements of Part 2A. Existing investment advisers registered with the SEC are required to comply with the requirements of Part 2A upon filing updating amendments for fiscal years ending on and after December 31, 2010. Within 60 days of filing that amendment with the SEC, the adviser must deliver the new brochure to its existing clients Part 2B of Form ADV: Brochure Supplement Newly-registered investment advisers filing their applications for registration from January 1, 2011 through April 30, 2011, have until May 1, 2011 to begin delivering brochure supplements to new and prospective clients. These advisers have until July 1, 2011 to deliver brochure supplements to existing clients. The compliance dates for delivering brochure supplements for newly-registered investment advisers filing applications for registration after April 30, 2011 remain unchanged. Existing investment advisers registered with the SEC as of December 31, 2010, and having a fiscal year ending on December 31, 2010 through April 30, 2011, have until July 31, 2011, to begin delivering brochure supplements to new and prospective clients. These advisers have until September 30, 2011 to deliver brochure supplements to existing clients. The compliance dates for delivering brochure supplements for existing registered investment advisers with fiscal years ending after April 30, 2011 remain unchanged. - 2 -
Part 2A of Form ADV: Firm Brochure Preparation: Each client must receive the brochure; except: For SEC-registered advisers, delivery of brochure not required to either (1) clients who receive only impersonal investment advice and pay less than $500 per year; or (2) clients that are SEC-registered investment companies or business development companies under the Investment Company Act of 1940. Format: Narrative format written in plain English Indicate if an item does not apply Cross-referencing among items is permissible Should discuss only actual or reasonably likely conflicts or practices Updates: Each year for annual update (within 90 days of fiscal year end); and Promptly whenever any information in the brochure becomes materially inaccurate Filing: Brochure and amendments must be filed through the IARD system using the text-searchable Adobe Portable Document Format ( PDF ) State-registered advisers must file a copy of the brochure supplement for each supervised person doing business in that state Delivery: Brochure must be delivered before or at the time of entering into an advisory agreement with that client. Delivery of interim amendments, which can be in the form of a document describing the material facts, is not required unless the amendment includes information in response to Item 9 of Part 2A (disciplinary information). Annually deliver, within 120 days of fiscal year end, of (1) a free updated brochure that either includes a summary of material changes or is accompanied by a summary of material changes; or (2) a summary of material changes that includes an offer to provide a copy of the updated brochure and information on how a client may obtain the brochure. - 3 -
Part 2A of Form ADV: Firm Brochure Item Number Requirements Additional Guidance 1. Cover Page Adviser s name, business address, contact information, website address (if available), and the date of the brochure The following statement or similar concise language conveying the same information: If advisory business primarily conducted under a name different from full legal name and business name is disclosed in Item 1.B of Part1A of Form ADV, then may use business name throughout brochure This brochure provides information about the qualification and business practices of [firm name]. If you have any questions about the contents of this brochure, please contact us at [telephone number and/or email address]. The information in this brochure has not been approved or verified by the United States and Exchange Commission or by any state securities authority. Additional information about [firm name] also is available on the SEC s website at www.adviserinfo.sec.gov. If adviser is referred to as a registered investment adviser or as being registered, include a statement that registration does not imply a certain level of skill or training. 2. Material Changes If amending brochure for annual update and it contains material changes from the last update, identify those changes on the cover page of the brochure or on the page immediately following the cover page, or as a separate document accompanying the brochure. Include: Clear statement that only material changes since last annual update of brochure are included Need not provide this information to a client or prospective client who has not received a previous version of brochure The SEC emphasized we intend this document to be a summary... it should not be a lengthy discussion Date of last annual update 3. Table of Contents Table of contents to the brochure Must be detailed enough so that clients can locate topics easily Brochure must follow same order and contain same headings as items in Part 2A - 4 -
4. Advisory Business (Compare to Item 1 in the previous version of Form ADV Part II) 5. Fees and Compensation (Compare to Item 1 in the previous version of Form ADV Part II) Describe advisory firm, including how long it has been in business Identify principal owner(s) Describe the type of advisory services offered. If adviser holds itself out as specializing in a particular type of advisory service (e.g., financial planning, quantitative analysis, or market timing), explain in greater detail. Disclose if adviser limits itself to certain types of investments, and explain which investments. Disclose whether and how adviser tailors advisory services to the individual needs of the clients. Explain whether clients may restrict investments in certain securities. If adviser participates in wrap fee programs by providing portfolio management services, describe the differences between how wrap fee and other accounts are managed. Disclose that adviser receives a portion of the wrap fee for services. If adviser manages client assets, disclose the amount of discretionary and the amount of non-discretionary assets (may be rounded to the nearest $100,000). Include the as of date, which must not be more than 90 days from the date of the Form ADV update. Provide fee schedule Disclose whether fees are negotiable Describe whether and how often adviser bills for or deducts fees from client assets (or both) Describe other types of fees or expenses (e.g., custodian fees or mutual fund expenses) Disclose that clients will incur brokerage and other transaction costs, and direct clients to Item 12 For this item, principal owners include the persons listed as owning 25% or more of advisory firm (ownership codes C, D, or E) in Schedule A of Form ADV Part 1A Disclose if advisory firm is publicly held without a 25% shareholder If an individual or company owns 25% or more of advisory firm through subsidiaries, identify the individual or parent company and intermediate subsidiaries SEC-registered advisers must identify intermediate subsidiaries that are publicly held State-registered advisers must disclose all intermediate subsidiaries Method of calculation may be different from the AUM calculation under Item 5.F in Part 1A; however, if different method is used, must keep documentation describing the method. SEC-registered advisers delivering the brochure only to qualified purchasers (as defined in section 2(a)(51)(A) of the Investment Company Act) need not disclose fee schedule and whether fees are negotiable - 5 -
If fees must be paid in advance: Explain how a client may obtain a refund of a pre-paid fee if advisory contract is terminated before the end of the billing period. Explain how the amount of the refund will be determined Disclose if adviser or supervised persons accepts compensation for the sale of securities or other investment products, including asset-based sales charges or service fees from sale of mutual funds, and respond to the following: Disclose that this practice presents a conflict of interest because of incentives to recommend products based on the compensation. List procedures for addressing the conflict. If adviser primarily recommends mutual funds, disclose whether adviser will recommend no-load funds. Explain that clients have the option of purchasing adviser-recommended products through other brokers or agents unaffiliated with the adviser If more than 50% of adviser s revenue from advisory clients results from commissions, disclose that commissions are adviser s primary or exclusive compensation If advisory fees are charged in addition to commissions, disclose whether advisory fees are reduced to offset commissions 6. Performance-Based Fees and Side-By-Side Management Disclose if adviser or any supervised persons receive performance-based fees Disclose if adviser or any supervised persons manage accounts that are charged a performance-based fee alongside accounts that are charged another type of fee. Explain that this practice constitutes a conflict of interest (e.g., creates incentives) and generally how adviser addresses any conflicts - 6 -
7. Types of Clients (Compare to Item 1 in the previous version of Form ADV Part II) 8. Methods of Analysis, Investment Strategies and Risk of Loss (Compare to Item 4 in the previous version of Form ADV Part II) 9. Disciplinary Information Describe types of clients (e.g., individuals, trusts, investment companies, or pension plans) Disclose requirements, if any, for opening or maintaining an account (e.g., minimum account size) Describe methods of analysis and investment strategies used in formulating advice Explain that investing in securities involves a risk of loss that clients should be prepared to bear For each investment strategy or method, explain the material risks in detail If primary strategy involves frequent trading, explain how it can affect investment performance (e.g., increased brokerage and other transaction costs and taxes) If adviser recommends primarily a particular type of security, explain the material risks Disclose any disciplinary events and material facts thereto that are material to a client s or prospective client s evaluation of advisory business or the integrity of management for the ten years (or more if event is so serious that it remains material) following the event, unless (1) the event was resolved in adviser s or the management s favor, or was reversed, suspended or vacated; or (2) the presumption of materiality has been rebutted. Describe significant or unusual risks in greater detail Consider the following factors to rebut materiality presumption: (1) the proximity of the person involved in the disciplinary event to the advisory function; (2) the nature of the infraction; (3) the severity of the sanction; (4) the time elapsed since the event If an infraction is immaterial, prepare and maintain a file memorandum in adviser s records (see Rule 204-2(a)(14)(iii)) Disclosures of arbitration awards are not required. However, advisers should consider whether particular arbitration awards or settlements implicate wrongdoing and/or reflect on the integrity of the adviser and should be disclosed to clients in the brochure or through - 7 -
other means (as failure to disclose material information would violate section 206 of the Advisers Act) 10. Other Financial Industry Activities and Affiliations (Compare to Item 8 in the previous version of Form ADV Part II) Disclose if adviser or any management persons are registered or have a pending application to register as: A broker-dealer or a registered representative of one A futures commission merchant, commodity pool operator, commodity trading advisor, or any associated persons of one of the foregoing entities Describe any arrangement (material to clients or advisory business) that adviser or management persons have with any of the following related persons: Broker-dealer, municipal securities dealer, or government securities dealer or broker; investment company or other pooled investment vehicle (including a mutual fund, closed-end investment company, unit investment trust, private investment company or hedge fund, and offshore fund); other investment adviser or financial planner; futures commission merchant, commodity pool operator, or commodity trading advisor; banking or thrift institution; accountant or accounting firm; lawyer or law firm; insurance company or agency; pension consultant; real estate broker or dealer; sponsor or syndicator of limited partnerships. If any of the foregoing arrangements create a material conflict of interest, describe the conflict and how adviser addresses it. Describe any material conflicts of interest and how adviser addresses any conflict of interest stemming from any business relationships with other advisers (e.g., if adviser recommends or selects other investment advisers for clients and receives compensation from the advisers) - 8 -
11. Code of Ethics (Compare to Item 9 in the previous version of Form ADV Part II) 12. Brokerage Practices (Compare to Item 12 in the previous version of Form ADV Part II) For SEC-registered advisers, describe code of ethics State that adviser will provide a copy of code of ethics to any client or prospective client upon request Describe practices and explain how adviser addresses any conflicts that arise from: Adviser or a related person recommending to clients, or buying or selling for client accounts, securities in which adviser or a related person has a material financial interest Adviser or a related person investing in the same securities or related securities (e.g., warrants, options, or futures) that adviser or a related person recommends to clients Adviser or a related person recommending securities to clients, or buying or selling securities for client accounts, at or about the same time that adviser or a related person buys or sells the same securities for adviser s own or related person s account Describe factors that adviser considers in selecting or recommending brokerdealers and determining the reasonableness of the compensation Soft Dollar Practices. List all soft dollar benefits and discuss any conflicts Explain that by using brokerage commissions to obtain research (or other products or services) adviser receives a benefit because adviser does not have to pay for those products or services Disclose that adviser has an incentive to select or recommend a brokerdealer based on adviser s interest in receiving the research or other products or services, rather than adviser s clients interest in receiving the most favorable execution Disclose if adviser may cause clients to pay commissions higher than those charged by other broker-dealers in return for soft dollar benefits The description of the code of ethics should be brief and concise If description of code of ethics includes information relevant to the remaining responses, it is not necessary to make repeated disclosures When addressing practices and conflicts of interest, only include information with respect to reportable securities under SEC rule 204A- 1(e)(10) and similar state rules (i.e., it does not apply to securities in unaffiliated mutual funds) Descriptions of the types of products and services adviser or any of related persons acquired with client brokerage commissions within last fiscal year must be specific enough for clients to understand Description must be even more detailed for products or services that do not qualify for the safe harbor in section 28(e) of the Securities Exchange Act of 1934 Most of the Directed Brokerage disclosures do not apply if clients only have directed brokerage arrangement subject to most favorable execution - 9 -
Disclose if adviser uses soft dollar benefits to service all client accounts or only those that paid for the benefits Disclose whether adviser seeks to allocate soft dollar benefits to client accounts proportionally to the soft dollar credits the accounts generate Describe the types of products and services adviser or any of your related persons acquired with client brokerage commissions within last fiscal year Explain the procedures adviser used during last fiscal year to direct client transactions to a particular broker-dealer in return for soft dollar benefits Client Referrals. Disclose if adviser receives client referrals from a brokerdealer or third party and considers this fact when recommending broker-dealers Disclose any procedures used during last fiscal year to direct client transactions to a particular broker-dealer in return for client referrals Directed Brokerage. If adviser (i) permits clients to direct brokerage or (ii) routinely recommends, requests or requires that a client direct adviser to execute transactions through a specified broker-dealer, describe practice or policy. Explain that advisory firm may not be able to achieve the most favorable execution of client transactions and that this practice may cost clients more money. If advisory firm and the broker dealer are affiliates or have another economic relationship that creates a material conflict of interest, discuss the relationship and the conflicts Trade Aggregation. Discuss practices relating to aggregation of purchase or sale of securities Disclose whether and under what conditions the purchase or sale of securities for client accounts is aggregated. If orders not aggregated when it is possible to do so, explain practice and describe the costs to clients of not aggregating - 10 -
13. Review of Accounts (Compare to Item 11 in the previous version of Form ADV Part II) Indicate whether adviser periodically reviews client accounts or financial plans If so, discuss the frequency and nature of the review, including the titles of the supervised persons who conduct the review 14. Client Referrals and Other Compensation (Compare to Item 13 in the previous version of Form ADV Part II) If client accounts are reviewed on a nonperiodic basis, describe the factors that trigger review Describe the content and frequency of regular reports adviser provides to clients regarding their accounts, and indicate whether such reports are written Discuss any arrangement and conflicts arising from: A nonclient providing adviser with an economic benefit for providing investment advice or services to clients Adviser or a related person compensating any person who is not a supervised person for client referrals If adviser compensates any person for client referrals, consider whether SEC rule 206(4)(3) or similar state rules regarding solicitation arrangements and/or state rules requiring registration of investment adviser representatives apply 15. Custody If adviser has custody of client funds or securities and a qualified custodian sends quarterly, or more frequent, account statements directly to clients, explain that clients will receive account statements from the brokerdealer, bank or other qualified custodian and that clients should carefully review those statements. If clients also receive account statements, explanation must include a statement urging clients to compare the account statements they receive from the qualified custodian with those they receive from advisory firm. 16. Investment Discretion (Compare to Item 12 in the previous version of Form ADV Part II) If adviser accepts discretionary authority to manage securities accounts on behalf of clients, disclose this fact and describe any limitations clients may (or customarily do) place on this authority. Describe the procedures followed before assuming this authority (e.g., execution of a power of attorney). - 11 -
17. Voting Client Securities Describe voting policies and procedures Describe whether (and, if so, how) clients can direct the vote in a particular solicitation. 18. Financial Information (Compare to Item 14 in the previous version of Form ADV Part II) Describe how conflicts of interest addressed between advisory firm and clients with respect to voting securities. Describe how clients may obtain information about how their securities were voted. Explain to clients that they may obtain a copy of proxy voting policies and procedures upon request. If no authority to vote client securities, disclose this fact. Explain whether clients will receive their proxies or other solicitations directly from their custodian or a transfer agent or from advisory firm, and discuss whether (and, if so, how) clients can contact adviser with questions about a particular solicitation. Balance Sheet Disclosure. If adviser requires or solicits prepayment of more than $1,200 in fees per client, six months or more in advance, include a balance sheet for most recent fiscal year. Financial Condition Disclosure. If adviser has discretionary authority or custody of client funds or securities, or adviser requires or solicits prepayment of more than $1,200 in fees per client, six months or more in advance, disclose any financial condition that is reasonably likely to impair ability to meet contractual commitments to clients. Bankruptcy Disclosure. If adviser has been the subject of a bankruptcy petition at any time during the past ten years, disclose this fact, the date the petition was first brought, and the current status. With respect to the balance sheet and financial condition disclosures, if adviser is registered or registering with one or more of the state securities authorities, the dollar amount reporting threshold for including the required balance sheet and for making the required financial condition disclosures is more than $500 in fees per client, six months or more in advance. Balance sheet not required if adviser is also: (1) a qualified custodian as defined in SEC rule 206(4)-2 or similar state rules; or (2) an insurance company. The balance sheet must be prepared in accordance with generally accepted accounting principles, audited by an independent public accountant, and accompanied by a note stating the principles used to prepare it, the basis of securities included, and any other explanations - 12 -
required for clarity. Show parenthetically the market or fair value of securities included at cost. Qualifications of the independent public accountant and any accompanying independent public accountant s report must conform to Article 2 of SEC Regulation S- X. If adviser is a sole proprietor, show investment advisory business assets and liabilities separate from other business and personal assets and liabilities. Adviser may aggregate other business and personal assets unless advisory business liabilities exceed advisory business assets. If adviser has not completed first fiscal year, include a balance sheet dated not more than 90 days prior to the date of brochure. 19. Requirements for State-Registered Advisers Disclose the following information, unless already disclosed elsewhere on Form ADV: Principal executive officers and management persons, as well as their formal education and business background Any business in which adviser is actively engaged (other than giving investment advice) and the approximate amount of time spent on the business In addition to the information provided under Item 5, if adviser or a supervised person is compensated with performance-based fees, explain how the fees will be calculated This item is only required for advisers registering or registered with one or more state securities authorities - 13 -
If adviser or a management person has been involved in one of the following events, disclose all material facts thereto: 1. An award or otherwise being found liable in an arbitration claim alleging damages in excess of $2,500, involving any of the following: (a) an investment or an investment-related business or activity; (b) fraud, false statement(s), or omissions; (c) theft, embezzlement, or other wrongful taking of property; (d) bribery, forgery, counterfeiting, or extortion; or (e) dishonest, unfair, or unethical practices. 2. An award or otherwise being found liable in a civil, self-regulatory organization, or administrative proceeding involving any of the following: (a) an investment or an investment-related business or activity; (b) fraud, false statement(s), or omissions; (c) theft, embezzlement, or other wrongful taking of property; (d) bribery, forgery, counterfeiting, or extortion; or (e) dishonest, unfair, or unethical practices. Discuss any relationship or arrangement that adviser or any management person has with any issuer of securities - 14 -
Part 2A Appendix 1 of Form ADV: Wrap Fee Program Brochure General: A wrap fee program brochure takes the place of your advisory firm brochure required by Part 2A of Form ADV, but only for clients of wrap fee programs that you sponsor. Preparation: Sponsors of wrap fee programs must give a wrap fee program brochure to each client of the wrap fee program; except: No wrap fee program brochure need be created or delivered if a wrap fee program has multiple sponsors and another sponsor creates and delivers to your wrap fee program clients a wrap fee program brochure that includes all the information required in your wrap brochure. Updates: Each year for annual update (within 90 days of fiscal year end); and Promptly whenever any information in the wrap fee program brochure becomes materially inaccurate Delivery: Wrap fee program brochure must be delivered to each client of the wrap fee program before or at the time the client enters into a wrap fee program contract. Annually deliver, within 120 days of the end of your fiscal year, to each client a free updated wrap fee program brochure that (1) either includes a summary of material changes or is accompanied by a summary of material changes; or (2) deliver to each client a summary of material changes that includes an offer to provide a copy of the updated wrap fee program brochure and information on how a client may obtain the wrap fee program brochure. Interim amendment, which can be in the form of a document describing the material facts relating to the amended disciplinary event, does not need to be delivered to clients unless the amendment includes information in response to Item 9 of Part 2A (disciplinary information). - 15 -
Part 2A Appendix 1 of Form ADV: Wrap Fee Program Brochure (Compare to Schedule H in the previous version of Form ADV Part II) Item Number Requirements Additional Guidance 1. Cover Page Adviser s name, business address, contact information, website address (if available), and the date of the brochure The following statement or similar concise language conveying the same information: If advisory business primarily conducted under a name different from full legal name and business name is disclosed in Item 1.B of Part1A of Form ADV, then may use business name throughout wrap fee program brochure This wrap fee program brochure provides information about the qualification and business practices of [adviser s name]. If you have any questions about the contents of this brochure, please contact us at [telephone number and/or email address]. The information in this brochure has not been approved or verified by the United States Securities and Exchange Commission or by any state securities authority. Additional information about [adviser s name] also is available on the SEC s website at www.adviserinfo.sec.gov. If adviser is referred to as a registered investment adviser or as being registered, include a statement that registration does not imply a certain level of skill or training. 2. Material Changes If amending wrap fee program brochure for annual update and it contains material changes from the last update, identify those changes on the cover page, on the page immediately following the cover page, or as a separate document accompanying the wrap fee program brochure. Include: Must not provide this information to a client or prospective client who has not received a previous version of wrap fee program brochure Clear statement that only material changes since last annual update of brochure are included Date of last annual update - 16 -
3. Table of Contents Table of contents to the brochure Must be detailed enough so that clients can locate topics easily 4. Services, Fees and Compensation Describe the services, including the types of portfolio management services, provided under each program. Indicate the wrap fee charged for each program or, if fees vary according to a schedule, provide fee schedule. Indicate whether fees are negotiable and identify the portion of the total fee, or the range of fees, paid to portfolio managers. Explain that the program may cost the client more or less than purchasing such services separately and describe the factors that bear upon the relative cost of the program, such as the cost of the services if provided separately and the trading activity in the client's account. Describe any fees that the client may pay in addition to the wrap fee, and describe the circumstances under which clients may pay these fees, including, if applicable, mutual fund expenses and markups, mark-downs, or spreads paid to market makers. If the person recommending the wrap fee program to the client receives compensation as a result of the client's participation in the program, disclose this fact. Explain, if applicable, that the amount of this compensation may be more than what the person would receive if the client participated in adviser s other programs or paid separately for investment advice, brokerage, and other services. Explain that the person, therefore, may have a financial incentive to recommend the wrap fee program over other programs or services Must follow the same order and contain the same headings as those in the appendix - 17 -
5. Account Requirements and Types of Clients If a wrap fee program imposes any requirements to open or maintain an account, such as a minimum account size, disclose these requirements. If there is a minimum amount for assets placed with each portfolio manager as well as a minimum account size for participation in the wrap fee program, disclose and explain these requirements. To the extent applicable to adviser s wrap fee program clients, describe the types of clients to whom adviser generally provides investment advice, such as individuals, trusts, investment companies, or pension plans. 6. Portfolio Manager Selection and Evaluation Describe how adviser selects and reviews portfolio managers, the basis for recommending or selecting portfolio managers for particular clients, and criteria for replacing or recommending the replacement of portfolio managers for the program and for particular clients. Describe any standards used to calculate portfolio manager performance, such as industry standards or standards used solely by adviser. Indicate whether adviser reviews, or whether any third-party reviews, performance information to determine or verify its accuracy or its compliance with presentation standards. If so, briefly describe the nature of the review and the name of any third party conducting the review. If applicable, explain that neither adviser nor a third-party reviews portfolio manager performance information, and/or that performance information may not be calculated on a uniform and consistent basis. Disclose whether any of adviser s related persons act as a portfolio manager for a wrap fee program described in the wrap fee program brochure. - 18 -
Explain the conflicts of interest that adviser faces because of this arrangement and describe how these conflicts of interest are addressed. Disclose whether related person portfolio managers are subject to the same selection and review as the other portfolio managers that participate in the wrap fee program. If they are not, describe how adviser selects and reviews related person portfolio managers. If adviser, or any supervised persons covered under your investment adviser registration, act as a portfolio manager for a wrap fee program described in the wrap fee program brochure, respond to Items 4 (Advisory Business), 6 (Performance-Based Fees and Side-By-Side Management), 8. (Methods of Analysis, Investment Strategies and Risk of Loss) and 17 (Voting Client Securities) of Part 2A of Form ADV 7. Client Information Provided to Portfolio Managers 8. Client Contact with Portfolio Managers Describe the information about clients that adviser communicates to the clients portfolio managers, and how often or under what circumstances adviser provides updated information. Explain any restrictions placed on clients ability to contact and consult with their portfolio managers 9. Additional Information Respond to items 9, 10, 11, 13, 14, and 18 with respect to wrap fee program and clients 10. Requirements for State-Registered Advisers Disclose any relationship or arrangement that adviser or any management person has with any issuer of securities - 19 -
Part 2B of Form ADV: Brochure Supplement Preparation Adviser must prepare a brochure supplement for the following supervised persons: (1) Any supervised person who formulates investment advice for a client and has direct client contact; and (2) Any supervised person who has discretionary authority over a client s assets, even if the supervised person has no direct client contact If discretionary 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 discretionary advice provided to the client. See SEC rule 204-3(b) and similar state rules If adviser has no clients to whom adviser must deliver a brochure supplement then adviser need not prepare any brochure supplements No supplement is required for a supervised person who has no direct client contact and has discretionary authority over a client s assets only as part of a team (e.g., certain analysts and researchers) Format: Written in plain English, but there is flexibility in presenting the information in a format that is best suited the advisory firm Filing: SEC-registered advisers are not required to file brochure supplements, but advisers are required to maintain copies of all supplements and amendments to supplements If adviser is registered or registering with one or more state securities authorities, must file through IARD a copy of the brochure supplement for each supervised person doing business in that state Delivery: Must deliver the supplement for a supervised person before or at the time that supervised person begins to provide advisory services to a client. Must deliver to clients any update to the supplement that amends information in response to Item 3 of Part 2B (disciplinary information). Such an amendment can be in the form of a sticker that identifies the information that has become inaccurate and provides the new information and the date of the sticker. Delivery not required: Adviser is not required to deliver supplements to clients (1) to whom adviser is not required to deliver a firm brochure (or a wrap fee program brochure); (2) who receive only impersonal investment advice, even if they receive a firm brochure; and (3) who are individuals who would be qualified clients (i.e,. (a) any executive officers, directors, trustees, general partners, or persons serving in a similar capacity, of adviser s firm; or (b) any employees of adviser s firm (other than employees performing solely clerical, secretarial or administrative functions) who, in connection with their regular functions or duties, participate in the investment activities of adviser s firm and have been performing such functions or duties for at least 12 months.) - 20 -
Part 2B of Form ADV: Brochure Supplement Item Number Requirements Additional Guidance 1. Cover Page Supervised person s name, business address, and telephone number (if different than the firm s) Firm s name, business address and telephone number Date of the supplement The following statement or similar concise language conveying the same information: This brochure supplement provides information about [name of supervised person] that supplements the [name of advisory firm s] brochure. You should have received a copy of that brochure. Please contact [service center or name and/or title of your contact person] if you did not receive [name of advisory firm] s brochure or if you have any questions about the contents of this supplement. Adviser does not have to include statement directing clients to the public website unless the supervised person is an investment adviser representative required to register with state securities authorities. Cover Page information must be on the cover page of the supplement but need not be the only information on the cover page. If other information is included on the cover page of the supplement, the Cover Page information must be on the top of the first page of the supplement. 2. Educational Background and Business Experience (Compare to Items 5 and 6 in the previous version of Form ADV Part II) Additional information about [name of supervised person] is available on the SEC s website at www.adviserinfo.sec.gov. Disclose the supervised person s name, age (or year of birth), formal education after high school, and business background (including an identification of the specific positions held) for the preceding five years. If the supervised person has no high school education, no formal education after high school, or no business background, disclose this fact. May list any professional designations held by the supervised person, but if so, must provide a sufficient explanation of the minimum qualifications required for each designation to allow clients to understand the value of the designation. 3. Disciplinary Information Disclose any disciplinary events and material facts thereto that are material to a client s or prospective client s evaluation of the supervised person business or the integrity of adviser s management for the ten years (or more if event is so serious that it remains material) following the event, unless (1) the event was resolved in Consider the following factors to rebut materiality presumption: (1) the proximity of the person involved in the disciplinary event to the advisory function; (2) the nature of the infraction; (3) the severity of the sanction; (4) - 21 -
the supervised person s favor, or was reversed, suspended or vacated; or (2) the presumption of materiality has been rebutted. 4. Other Business Activities If the supervised person is actively engaged in any investmentrelated business or occupation, including if the supervised person is registered, or has an application pending to register, as a brokerdealer, registered representative of a broker-dealer, futures commission merchant ( FCM ), commodity pool operator ( CPO ), commodity trading advisor ( CTA ), or an associated person of an FCM, CPO, or CTA, disclose this fact and describe the business relationship, if any, between the advisory business and the other business. the time elapsed since the event. If infraction is immaterial, must prepare and maintain a file memorandum in adviser s records (see Rule 204-2(a)(14)(iii)) If the other business activities represent less than 10 percent of the supervised person s time and income, may presume that they are not substantial If a relationship between the advisory business and the supervised person s other financial industry activities creates a material conflict of interest with clients, describe the nature of the conflict and generally how adviser addresses it. If the supervised person receives commissions, bonuses or other compensation based on the sale of securities or other investment products, including as a broker-dealer or registered representative, and including distribution or service ( trail ) fees from the sale of mutual funds, disclose this fact. If this compensation is not cash, explain what type of compensation the supervised person receives. Explain that this practice gives the supervised person an incentive to recommend investment products based on the compensation received, rather than on the client s needs. If the supervised person is actively engaged in any business or occupation for compensation not discussed in response to the item above, and the other business activity or activities provide a substantial source of the supervised person s income or involve a substantial amount of the supervised person s time, disclose this fact and describe the nature of that business. - 22 -
5. Additional Compensation (Compare to Item 13 in the previous version of Form ADV Part II) If someone who is not a client provides an economic benefit to the supervised person for providing advisory services, generally describe the arrangement. Economic benefits include sales awards and other prizes, but do not include the supervised person s regular salary. Any bonus that is based, at least in part, on the number or amount of sales, client referrals, or new accounts should be considered an economic benefit, but other regular bonuses should not. 6. Supervision Explain how adviser supervises the supervised person, including how adviser monitors the advice the supervised person provides to clients. Provide the name, title and telephone number of the person responsible for supervising the supervised person s advisory activities on behalf of adviser s firm. 7. Requirements for State-Registered Advisers If the supervised person has been involved in one of the events listed below, disclose all material facts regarding the event. 1. An award or otherwise being found liable in an arbitration claim alleging damages in excess of $2,500, involving any of the following: (a) an investment or an investment-related business or activity; (b) fraud, false statement(s), or omissions; (c) theft, embezzlement, or other wrongful taking of property; (d) bribery, forgery, counterfeiting, or extortion; or (e) dishonest, unfair, or unethical practices. 2. An award or otherwise being found liable in a civil, selfregulatory organization, or administrative proceeding involving any of the following: (a) an investment or an investment-related business or activity;(b) fraud, false statement(s), or omissions; (c) theft, embezzlement, or other wrongful taking of property; (d) bribery, forgery, counterfeiting, or extortion; or (e) dishonest, unfair, or unethical practices. If the supervised person has been the subject of a bankruptcy petition, disclose that fact, the date the petition was first brought, and the current status. - 23 -