In October 2010, the Securities and Exchange Commission
created a new Part 2 for Form ADV. Instead of filling in blanks, investment
advisers need to create a brochure for delivery to clients and prospective
clients. For fund managers getting ready to register, that means writing a
brochure, not just filling in boxes.
One question for fund managers is "who do you have to
give the brochure to?" The SEC
answered that question and many others about Part 2 of Form ADV.
Question III. 2
Q: Rule 204-3 requires an
adviser to deliver a brochure and one or more brochure supplements to each
client or prospective client. Does rule 204-3 require an adviser to a hedge or
other private fund to deliver a brochure and supplement(s) to investors in the
A: Rule 204-3 requires only
that brochures be delivered to "clients." A federal court has stated that a
"client" of an investment adviser managing a hedge fund is the hedge fund
itself, not an investor in the hedge fund. (Goldstein v.
Securities and Exchange Commission, 451 F.3d 873 (D.C. Cir. 2006)). An
adviser could meet its delivery obligation to a hedge fund client by delivering
its brochure to a legal representative of the fund, such as the fund's general
partner, manager or person serving in a similar capacity. (Posted March 18,
Question III. 3
Q: Must an adviser to a hedge
fund or other private fund file as part of its Form ADV the brochure it is
required to deliver to the hedge fund or other private fund?
That answers the legal questions. You don't have to
deliver it to investors, but you do need to file it with the SEC. From a
practical perspective, potential investors in the fund often ask for a copy of
the Form ADV as part of their due diligence. So you end up giving it to many of
your investors and not just the fund.
The other missing piece for fund managers is the new Part
1 of Form ADV. The SEC proposed some significant changes and has not yet
released the final form. The SEC is cutting this one close. Early June is the
hard deadline for filing. Before that the SEC will need to get the IARD system
updated with the new fields. Perhaps they are updating IARD now so it will be
ready when the final rule comes out? I doubt it.
additional commentary on developments in compliance and ethics, visit Compliance Building,
a blog hosted by Doug Cornelius.
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