The SEC wants to extend its campaign to eliminate legal-speak in mutual fund prospectuses to documents fund advisers file disclosing key fund information. Extending what is called "plain English" to these documents, known as Form ADVs, is likely to generate more work for lawyers and consultants and add what should be a one-time expense for fund advisers.
If a new SEC proposal is adopted, virtually every mutual fund advisory firm will have to revise their Form ADVs, according to fund industry lawyers. The consequences for fund companies should not be enormous, but it will require lawyers, compliance executives and perhaps writing consultants to revise a document whose format has been largely unchanged for 15 years, lawyers said.
"I'm certain advisers will have to rewrite their ADVs, period," said Richard Marshall, a lawyer in the New York office of Kirkpatrick & Lockhart LLP of Pittsburgh.
The SEC on April 5 proposed a wide-ranging revision to the form that will require advisers to report more information than the current Form ADV requires and provide much of that information in a narrative written in plain English. The SEC has given the public until June 13 to comment on the proposal.
If adopted largely as is, investors for the first time will be able to review the new Form ADVs free of charge on the Internet. The Internet filing requirement is expected to be introduced in four stages beginning later this year. The requirement would be fully in effect sometime in 2001. Advisors now file Form ADVs on paper with the SEC.
Paul Roye, director of the sec's division of investment management, described the proposed Form ADV revision in a speech April 6 as the first major change in the form since it was adopted in 1985. The current version of Form ADV does not provide meaningful disclosure to investors about important adviser practices, Roye said.
The proposal, if adopted, will have a dramatic effect on registered investment advisors that deal directly with the public, according to fund industry lawyers. It calls for registered investment advisors to send more detailed information to their customers than is required under current rules. These advisors also will be required to send part of the form to investors whenever there is a significant change in content. That is a new requirement.
Fund advisers, who provide far more detailed disclosure to fund boards of directors than the information in the Form ADV, are not required to send the form to fund shareholders.
Nevertheless, fund advisers, along with just about all registered investment advisors, will incur some expense rewriting the form in plain English and including new information about proxy voting procedures and more detailed information about soft dollar practices, lawyers said.
Form ADV is far briefer than mutual fund prospectuses. The fund industry's experience with rewriting prospectuses in plain English in 1998 and 1999 as a result of a new SEC requirement should make the transition to the revised Form ADV easier for fund advisers than it will be for registered investment advisors, lawyers said. The SEC did not estimate the cost for advisers to revise their Form ADVs in plain English.
"I think it will be a lot like what everybody did with their prospectuses in the last few years," said Thomas Lemke, a lawyer in the Washington office of Morgan, Lewis & Bockius LLP of Philadelphia, referring to the switch to plain English for fund advisors.
The changes also will provide some benefit to fund advisers, according to some lawyers. Ready access to Form ADVs on the Internet will make it easier for fund companies to conduct due diligence on registered investment advisors who sell their funds. The Form ADV includes information about regulatory actions taken against advisors. That information will be readily available once the Form ADV is online, said Pamela Wilson, a lawyer at Hale & Dorr LLP of Boston. That will make it easier to avoid advisors who have a long history of regulatory trouble, Wilson said.
"You don't want to be associated with an IA that has any black marks at all," Wilson said.