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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
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)
additional commentary on developments in compliance and ethics, visit Compliance Building,
a blog hosted by Doug Cornelius.
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