Early indications are that new "simplified, “plain English" disclosures on SEC Form ADV, Part 2 - that begin April 2011 - are troublesome to advisers.  Unanimously approved by the SEC in July, the rule change is intended to make it simple for clients to compare advisers' services and business models.  Unfortunately, it's neither simple nor inexpensive to prepare.

The new Form ADV Part 2 replaces a check-the-box document and must be filed with the SEC by 3/31/11 for advisers whose fiscal year ends 12/31  According to InvestmentNews.com, here's what some advisers have encountered:

• Added costs and difficulty of transforming complicated legalese into readable text.
• Little direct guidance from the SEC on how the brochures should be written or organized.
• The average cost of a consultant to craft a new form reportedly ranges from $3K to $10K.
• In addition to the one-time fee, advisers will have costly and time-consuming updates throughout the year as changes occur in their practices.  A recent webcast survey of 100 advisers indicated that 4 of 5 advisers expect to spend 5 additional hours each month working on the form, including time spent updating the document once it is filed.
• Advisers find that considerable time is required, even when using any of the several free templates that were designed to simplify the task.  Replacing complicated topics with simple and lively narrative is particularly difficult.

“Advisers just want to cut and paste previous disclosures and it won't work,” said Patrick Burns Jr., an attorney and president of Advanced Regulatory Compliance.  “They're being asked to write short sentences with an active voice but the questions are more complex.”

Difficult areas for advisers to address include:

• Risks associated with a particular method of investment analysis, strategy or security in which an adviser specializes.
  
• Description of an adviser's pols and procedures if he or she votes on client securities.
• Disclosure of any soft-dollar services received from a B/D or 3rd party, and potential conflicts.

Advisers also are wrestling with how they're going to position, or "brand," their firm in this document, according to Fidelity EVP David Canter, who said:  “It's causing them to take a thoughtful look at how they're describing their practice to their clients and prospects.”

[C-I Note:  While firms take the time to thoughtfully consider how best to describe their practices, they should use this exercise as an opportunity to identify possible deficiencies or inconsistencies in its policies and procedures.  One can always build "a better mousetrap."]    [InvestmentNews, 10/4]