New regulatory world dawns with oppressive ADV Part 2 form

The new regulatory era is arriving – and the first sign of it is a new ADV brochure that the SEC says will take firms 15 to 60 hours to complete and cost more than $3,000.

Advisors have at least six months to complete the form, depending on when their fiscal years end. The SEC says filling out forms to create the new ADV Part 2 will cost advisory firms using outside consultants between $3,000 and $5,000 to create. For RIAs using an attorney to complete the task, the SEC estimates a cost in excess of $10,000.

“Nobody should be surprised by the change,” said Karen Barr, general counsel of the IAA, pointing out that the new rule is essentially the same as the one proposed in 2008.

Too cute?

Yet – something has changed: the world. The fact that the commissioners approved it so soon after passage of the giant reform package designed to address the financial crisis has some people marking it as the beginning of the new culture in Washington.

“It’s too cute for me to believe it’s coincidental,” says Zachary Gronich, owner and chief consultant of RIA In A Box. He predicts a huge bottleneck in the annual registration process “as every RIA in the country will now have to rewrite the document that is at the heart of their business.”

He also said he’s hiring two more staffers for his five-employee New York City company to cope with the influx of business as people turn to his company for help with the form. RIA IN A Box can complete the forms for much less than the $3,000 to $5,000 fee estimations made by the SEC, Gronich adds.

The new ADV Part 2 form has as one of its central precepts the idea of more disclosure – which is also merging as a tenet of the new regulatory regime in Washington. Indeed, this week, legislators were already reinforcing the point that they want more disclosure with the flap over a segment of the financial reform bill that some are interpreting to mean that the SEC is not subject to the Freedom of Information Act.

Advisors are also contending with the financial reform legislation, a new custody rule and a new pay-to-play rule (the last issued just last week).

Both small and large RIAs have more to contend with now, says Gronich: Small RIAs are suffering because they lack the staff to handle the changes; large RIAs, however, have more to cope with.

Larger RIAs more susceptible?

Barr said that larger RIAs may be affected by more of the measures in the financial reform legislation. For instance, an RIA that’s part of a larger organization may be swept up in new requirements for those companies so large that their failure poses a systemic risk, she said.

Both state-registered and SEC registered advisors will fill out the new ADV form.

The new requirements are outlined in a 174-page SEC requirements document. Briefly, they call for two sub-parts. Part 1 includes 18 different disclosures about the advisory firm while the second part includes information about each individual working at the firm who provides advice to clients. This is a potentially a big deal for some advisors who would – for instance – have to disclose that they didn’t attend college or that they experienced a personal bankruptcy, Gronich says.

The SEC says the brochures be written in plain English, in the active voice and use short sentences. The SEC expects most RIAs to retain outside compliance counsel to meet the new requirements. [Editor’s Note: I presume they’re not counting on lawyers to write short, simple sentences.]

Aguilar: Better for investors and SEC

The burden imposed on RIAs by the new rules will be made up for by its benefits, according to Commissioner Luis Aguilar.

“Today’s amendments to Part 2 of Form ADV are designed to provide enhanced and more meaningful disclosures,” he said in a July 21 open meeting letter. “This will benefit both investors and the SEC. Investors need clearly written, meaningful information to be in a position to make wise decisions — and, to be effective, the SEC must have access to information about those it regulates and the environments in which they operate. In addition, this information will now be filed with the SEC and will be accessible to the investing public, a vast improvement from the current lack of public access.”

He adds: “I support these amendments because they will further implement and give life to the investment adviser’s fiduciary duty.”

Click here for details about the regulation.

This document includes information for state-registered advisors at the end.