Source: https://seccc.com/news/procrastination/
Timestamp: 2020-07-09 08:06:14
Document Index: 412093703

Matched Legal Cases: ['art 2', 'art 2', 'art 2', 'art 1', 'art 1', 'art 2', 'art 2']

Home Communiques Procrastination…
The legal verbiage often used to disclose, disclose, and disclose (read “CYA“) will no longer suffice. The SEC wants to see the new ADV Form Part 2 and accompanying supplements written in plain English. If you are planning to write this in-house, at this point, you should have at least started some initial planning and hopefully have drafted some “plain English” writing samples. If you are planning to look to the experts, at this point, you should have narrowed down your list and be close to deciding who you will engage.
So, what does “plain English” mean?
The SEC wishes to move away from the traditional “legalese” disclosure and instead provide new and prospective clients with a brochure and brochure supplements written in plain English. These new disclosure documents are designed to provide new and prospective advisory clients with clearly written, meaningful, current disclosure of the business practices, conflicts of interest and background of the investment adviser and its advisory personnel.
Among other things, Warren Buffet is known for writing plain English letters to Berkshire Hathaway’s shareholders in Berkshire’s annual reports. When writing these, Mr. Buffet pretends he is talking to his two sisters, Doris and Bertie. While intelligent, his siblings are not experts in accounting or finance. However, they understand plain English and like most, jargon may puzzle them. His goal is to provide information that he would wish his sisters would supply him if their positions were reversed.
Now, while I am pretty sure the SEC does not want every brochure to begin “Dear Doris and Bertie”, I am sure they want registered investment advisers to provide the same degree and depth of information an adviser would want to receive in order to evaluate an investment opportunity.
Moving beyond the “plain English” requirements, some of the other more salient issues of the New Form ADV Part 2 are:
While publishing your brochure on the SEC’s website has been an option, the vast majority of advisers, for obvious reasons, have not done so. That is about to change as the new brochure is required to be published on the SEC’s website. Every lawyer and competitor will be able to read the entire contents of your brochure. Fortunately, the brochure supplement, which contains the personal information including qualifications and, if material, the more dubious and interesting disciplinary history of the five “supervised persons” who have the most day-to-day involvement in making the discretionary investment decisions, is not public.
Disclosure of conflicts of interest in Form ADV Part 2 is not meant to resemble a laundry list. The new brochure requires only those actual or likely-to-be conflicts be disclosed along with exactly how the conflict may affect clients and what the adviser is doing to monitor or control the associated risk. It will be important for advisers to ensure that brochure disclosure of risks and conflicts of interest match up to their “inventory of risks”, which is a current key focus area of the SEC.
Advisers need to describe their business including how long they have been in business , types of services provided, and whether an adviser considers itself a specialist in any particular area. Advisers also need to list their principal owners and their total assets under management (AUM). In describing its total AUM, an adviser can use a different number than in their ADV Part 1 if the adviser believes it would convey more meaningful information about the scope of the adviser’s business. AUM used in ADV Part 1 is primarily used to determine whether an adviser should register federally or with the state(s).
The SEC wants advisers to explain the material risks involved for each significant investment strategy, method of analysis used, and for each type of security recommended. In addition, advisers are required to disclose that loss with respect to investing in securities is possible. The SEC also requires a description of “material” risk. However, the SEC has specifically noted that Form ADV Part 2 may not be the best place to “disclose risks associated with all of its methods of analysis or strategies” and that doing so “likely would lengthen the brochure unnecessarily”. This indicates that the SEC wants clarity and brevity as opposed to the “laundry list” approach to disclosure of every possible risk or conflict.
As with the prior version of Form ADV Part 2, the SEC requires disclosure of the methods advisers use to select broker-dealers and how conflicts of interest are addressed regarding soft dollar benefits and services received. What is different about the new version is that the SEC wants responses to this item to be “living and breathing” in that it requires disclosure about broker selection methods used and actual soft dollar benefits received during the last fiscal year. In addition, more information about directed brokerage arrangements are required.
The SEC is focusing more on clarity, relevance,and brevity with regard to disclosure. Further, we again note that the new brochure is written in “plain English”, a type of writing which may seem elusive, but possible if we think of our own Doris and Bertie equivalents when writing. Refrain from simply trying to protect yourself as excessive and extraneous disclosure could in fact, result in exactly what you are trying to avoid – excessive SEC scrutiny. Finally, the revisions in the new brochure concerning disclosure of conflicts of interest are significant and will be carefully reviewed by the SEC. Evaluate your firm’s risks and conflicts, and then cautiously consider how to communicate these items as the SEC intended.