Roye Outlines Adviser Regulation:SEC Official Calls IARD a Success

By Rick Cortese

In a recent speech before the National Symposium on Investment Adviser Regulation, Paul Roye, director of the SEC Division of Investment Management, provided a status report on the Investment Adviser Registration Depository (IARD) and outlined the Division’s thinking regarding the proposed adoption of the new Form ADV Part 2.

Roye noted that the IARD, after more than eight months of operation, has been an unequivocal success, with virtually all SEC-registered investment advisers having completed the transition to the new system. Roye observed that "we have had an extremely positive reaction to the relative ease with which the Form [ADV] can be completed on-line."

In support of his assessment that information from IARD will enable the Commission to more effectively monitor trends and developments in the investment adviser area, Roye referred to findings contained in the recent report by National Regulatory Services and the Investment Counsel Association of America entitled "Evolution/Revolution – A Profile of the U.S. Advisory Profession". The report’s findings are based on data gleaned from IARD. Roye cited findings in the report that one-half of all SEC-registered advisers have discretionary assets under management of less than $100 million and that 5% of the firms manage 82% of all discretionary assets to illustrate the point that a small percentage of advisers oversee the vast majority of all assets under management.

Roye also referred to the report’s finding that most advisory firms are relatively small in size, with two thirds of firms reporting that they have ten or fewer employees. Among other noteworthy findings from the report, as cited by Roye, are:

• 36% of advisers are affiliated with broker-dealers;

• 32% of advisers or their related persons are general partners in an investment-related limited partnership or mangers of an investment-related limited liability company;

• 38% of advisers have no retail clients, 21% advise registered investment companies and 9.5% have no institutional clients; and

• 81% of advisers reported no disciplinary history at all, while 19% reported at least one affirmative answer to disciplinary questions related to them or to an advisory affiliate.

Going Public

Roye also commented on the launch of the Investment Adviser Public Disclosure website (IAPD). By visiting the IAPD website, prospective clients and others will be able to retrieve the current Form ADV filed by an adviser registered through IARD. Roye characterized IAPD as a powerful tool for investors that will assist them in making informed judgments when selecting an investment adviser.

Now that the IAPD has been launched, the next phase of the system will be the state investment adviser representative licensing system to be followed by the final phase which will eventually accommodate electronic filing of Part 2 of Form ADV.

Roye spoke at some length about the SEC proposal that advisory firms be required to provide clients with a narrative brochure, in plain English, describing their practices, policies and procedures. He noted that most commenters "overwhelmingly supported the new narrative format as an improvement over the current format" and believed that it improve communication with clients.

While underscoring the apparent consensus within the industry on the proposed narrative format and the scope of the disclosure requirements contained in the proposed Part 2, Roye acknowledged "disagreement on the proposed updating requirements, and the requirement that advisers provide clients with a supplement containing information about supervised persons.

With regarding to brochure updating, the Commission proposed that advisers update their brochures whenever a material change occurs and provide the information to clients in the form of a "sticker." The current rule only requires that advisers annually offer to deliver an updated brochure. Roye observed that some supported the "stickering" proposal "as a way to assure that advisers are fulfilling their fiduciary obligations."

On the other side of the fence are those who view the requirement as burdensome and expensive. Roye mentioned a possible compromise that would replace the annual offer requirement with an annual delivery requirement.

On the matter of the proposed brochure supplement, Roye reminded his audience that "the growth of some advisory firms meant that the firm brochure did not provide useful information about the advisory professionals with whom clients would be working. His defense of the proposal was predicated on the fact that the supplements would be less than a page in length and could be, as an alternative, combined with the brochure into a single document.

While noting that commenters were sharply divided on the need for and the efficacy of the brochure supplement, Roye argued that the goal of allowing clients or prospective clients to evaluate the background and credentials of investment advisory personnel is important.

Roye made it clear that the Commission would be mindful of the costs and burdens regarding the updating and brochure supplement proposals and that the concerns articulated by the commenters would be given careful consideration. Most industry observers expect the new Part 2 to be adopted by early next year.

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