Theodore J. Cohen spoke at the Dimensional Fund Advisors’ Succession Planning Conference, October 7, 2010, Santa Monica, CA.

Please click here to view his presentation.


©2012 Cohen/Mainzer  LLP.  All Rights Reserved.  Attorney Advertisement.  This document is not legal advice and you should not rely upon it as a substitute for legal advice based on your particular situation.  This document may not be accurate, complete or up to date, based on the facts applicable to you, and Cohen/Mainzer makes no representation or warranty that it is.  Receipt or use of this article does not create any attorney-client relationship between the user and Cohen/Mainzer.

By David Mainzer

September 2010

The Securities and Exchange Commission (the “SEC”) has adopted amendments to Form ADV Part 2, pursuant to SEC Release No. IA-3060 (the “Release”), which becomes effective on October 12, 2010. The changes are substantial. The format of Form ADV Part 2 will change from largely a “check the box” format to a narrative format that is to be written in “plain English” and include additional disclosure on a range of items. There is a completely new requirement for disclosure regarding specific investment management personnel managing the client’s assets. There are certain other technical changes, including that Form ADV Part 2 will be required to be filed electronically with the SEC. This article discusses some of the changes as they relate to SEC registered investment advisers.

New Format and Content

The current Form ADV Part II is composed of a six page list of questions provided by the SEC, with answers to be provided by the investment adviser, that are generally in either multiple choice or short answer format. In addition, SEC registered investment advisers are required to provide more detailed information on Schedules F, G and H that relates to the specific questions set forth on Form ADV Part II.

The new Form ADV Part 2A (the “Brochure”) provides a required format and order of presentation of information, which is intended, among other things, to make it easier for investors to compare one investment adviser to another. However, the required disclosures are more open ended, require narrative descriptions and in certain cases disclosures are based on the investment adviser’s expectations about the likelihood of future events. For example, the Release states that the Brochure should disclose all material risk factors relating to the investment adviser’s investment strategies and “… conflicts the adviser has or is reasonably likely to have, and practices in which it engages or is reasonably likely to engage.”

Overall, we expect that SEC registered investment advisers will disclose significantly more information than has been disclosed in the past, because of the narrative format and the uncertainty inherent in more open ended and subjective questions, compared with the current format which focuses more on responses to specific questions.

In addition to the more onerous content requirements, the Release provides that the investment adviser should “… communicate clearly … [and] … among other things, should use short sentences; definite, concrete, everyday words; and the active voice…”

Brochure Supplements

The Release includes a requirement that SEC registered investment advisers deliver a newly created Form ADV Part 2B (the “Brochure Supplement”) to each client that provides specific information about the particular investment adviser personnel that provide investment advice to the particular client. This will include anyone formulating and communicating investment advice to the client or managing the client’s assets on a discretionary basis. As with the Brochure, the Brochure Supplement must be prepared in plain English and be organized in the SEC’s format to enhance comparability between investment advisers.

Delivery Requirements

Currently, SEC registered investment advisers are required to deliver Form ADV Part II to clients either (a) at least 48 hours prior to entering into the advisory agreement or (b) at the time of entering into the advisory agreement (in which case, the client may terminate the agreement without penalty within five days). In addition, the investment adviser is required to deliver (or offer to deliver) an updated Form ADV Part II to each client annually.

The new rules require that SEC registered investment advisers deliver the Brochure to a client at the time it enters into an advisory agreement with the client. In addition, the investment adviser is required to deliver (or offer to deliver) to each client, within 120 days after the end of each fiscal year of the investment adviser, either (a) an updated Brochure and a summary of any material changes or (b) a summary of any material changes to the Brochure and an offer to provide a copy of the Brochure. SEC registered investment advisers are also required to deliver an updated Brochure promptly where there is new or changed disclosure relating to disciplinary information.

The new Brochure Supplement relating to the investment adviser’s personnel must (with certain exceptions) be provided to each client before the person provides any advisory services to the client. The investment adviser is required to deliver an updated Brochure Supplement only where there is new or changed disclosure relating to disciplinary information.

Note that, in all cases, pursuant to anti-fraud rules, an investment adviser is and will continue to be required to fully and fairly disclose material information its clients, regardless of whether required under the foregoing Brochure delivery rules.

Filing Requirements

SEC registered investment advisers are not currently required to file Form ADV Part II with the SEC or make it publicly available.

The Release requires that the new form of Brochure be filed electronically with the SEC through the IARD system, where it will be publicly available (as Form ADV Part I is now). The Brochure must be updated on IARD promptly if any information in the Brochure becomes “materially inaccurate.”

The Brochure Supplement is not required to be filed with the SEC.

Compliance Dates

SEC registered investment advisers are required to file their next annual updating amendment to Form ADV Part 2 via IARD and in the new format, with respect to any fiscal year ending on or after December 31, 2010. As an SEC registered investment adviser’s annual updating amendment is due within 90 days after the end of its fiscal year, most SEC registered investment advisers (those with a December 31, 2010 fiscal year end) will be required to file their Form ADV Part 2 in the new format not later than March 31, 2011. Also, any person applying for SEC investment adviser registration after January 1, 2011 will be required to file a Brochure meeting the new requirements.

The changes contemplated by the Release are likely to affect state registered investment advisers as well. For example, the California Department of Corporations will require California registered investment advisers to adopt the new Form ADV Part 2, generally applying essentially the same compliance dates applicable to SEC registered advisers.


©2010 Cohen/Mainzer  LLP.  All Rights Reserved.  Attorney Advertisement.  This document is not legal advice and you should not rely upon it as a substitute for legal advice based on your particular situation.  This document may not be accurate, complete or up to date, based on the facts applicable to you, and Cohen/Mainzer makes no representation or warranty that it is.  Receipt or use of this article does not create any attorney-client relationship between the user and Cohen/Mainzer.

By David Mainzer

August 2010

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) came into effect on July 21, 2010. The Dodd-Frank Act casts a very wide net that seems likely to cause some fundamental changes in the investment management industry. Most of the details relating to these changes are not spelled out in the Act itself. Instead, the Dodd-Frank Act gives very broad mandates to the Securities and Exchange Commission (the “SEC”), the Commodity Futures Trading Commission and other regulators to draft rules over the next year, covering a range of issues extending from the rules requiring investment advisers to register with the SEC (or state regulators) to the ways that investment advisers are compensated and resolve conflicts of interest. The Dodd-Frank Act has created substantial uncertainty for the industry and prompted a lot of speculation concerning the specifics of these new rules. More on that later…

One change that has had immediate effect under the Dodd-Frank Act affected the definition of “accredited investor” for purposes of Regulation D (“Reg. D”) under the Securities Act of 1933 (the “Securities Act”). Within the investment management industry, the effect of this change seems most significant for hedge funds, private equity funds and venture capital funds (collectively, “Private Funds”). Private Funds commonly rely on Reg. D in offering interests to US investors, which means that these Private Funds must ensure that new investors satisfy the changed definition.

The accredited investor definition is set forth in Rule 501(a) under the Securities Act and includes “any natural person whose individual net worth, or joint net worth with that person’s spouse, at the time of his purchase exceeds $1,000,000.” The change made to this definition by Section 413(a) of the Dodd-Frank Act is that, in calculating an investor’s net worth, an investor is no longer permitted to include the value of the investor’s primary residence. The SEC has issued guidance to the effect that investors are allowed to exclude any mortgage debt secured by their primary residence, except that if the mortgage debt exceeds the fair market value of the primary residence, then the investor must deduct the amount of the excess from their net worth. The Dodd-Frank Act allows the SEC to review and make further changes to the net worth requirements for natural persons in the near future, and requires that the SEC review this standard periodically over the longer term. The SEC is in the process of its initial review and, once completed, will update Rule 501(a) to reflect any applicable changes.

Private Funds relying on Reg. D will generally need to ensure that investors that are natural persons meet the accredited investor definition as it has been changed. This will typically require updating the investor questionnaire portion of the fund’s subscription documents and the permitted investors section of the fund’s private placement memorandum.

As the accredited investor definition is only relevant at the time an investor invests in a fund, Private Funds will generally not need to determine if their existing investors remain accredited investors after the change. However, as it is possible that an existing investor will no longer be an accredited investor, Private Funds should ensure that existing investors complete a new investor questionnaire before accepting additional investments in the fund. Private Funds that rely on Securities Act exemptions other than Reg. D (for example, offshore funds relying on Regulation S under the Securities Act) should not be affected by this change. 


©2010 Cohen/Mainzer  LLP.  All Rights Reserved.  Attorney Advertisement.  This document is not legal advice and you should not rely upon it as a substitute for legal advice based on your particular situation.  This document may not be accurate, complete or up to date, based on the facts applicable to you, and Cohen/Mainzer makes no representation or warranty that it is.  Receipt or use of this article does not create any attorney-client relationship between the user and Cohen/Mainzer.