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Banking and Finance

Risk Disclosures and Form ADV Part 2 for Fund Managers

If you're a fund manager getting ready to register because you've been Dodd-Frank'ed, then you are likely in the middle of drafting Part 2 of Form ADV, the brochure. One item that caused my to pause was the risk factor requirements in Item 8.

8.B:  For each significant investment strategy or method of analysis you use, explain the material risks involved. If the method of analysis or strategy involves significant or unusual risks, discuss these risks in detail. If your primary strategy involves frequent trading of securities, explain how frequent trading can affect investment performance, particularly through increased brokerage and other transaction costs and taxes.

Fund sponsors spend a great deal of time, money, and energy drafting risk factors for their fund's private placement offering memorandum.

Do you need to duplicate those risk factors in response to 8B or can you ignore them?

The SEC staff answered that question about Part 2 of Form ADV.

Question II. 4

Q: Item 8.B of Part 2A requires an adviser to explain the material risks for each significant investment strategy or method of analysis the adviser uses. Does Item 8.B require an adviser that uses pooled investment vehicles as a significant investment strategy or method of analysis to duplicate the risk disclosures contained in a prospectus or other offering document for the pooled investment vehicle?

A: An adviser may satisfy the requirement of Item 8.B by providing a brief explanation of the material risks for each strategy and referring clients to the prospectus, offering memoranda, or other documents that a client participating in the pool will or has received that set out a more detailed discussion of risks. (Posted March 18, 2011)


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