By now, most advisors are aware that the Securities and Exchange Commission (SEC) voted unanimously to approve a new Form ADV Part 2 during its July 21, 2010, meeting. This form is the primary disclosure document that SEC-registered investment advisors are required to provide to clients. States tend to mirror the SEC's disclosure requirements, so it is likely that many state-registered advisors will also be required to complete Form ADV Part 2 soon.
The old ADV Part 2 took a "check the box" approach to disclosure. Advisors were required to answer multiple choice questions by checking the appropriate box on the form. Supplementary information was disclosed on Schedule F and other forms.
In contrast, the new Form ADV Part 2 is supposed to be a plain English narrative that includes information about the firm's business, business practices, fees, compensation policies, disciplinary events, brokerage practices and more. In addition, there will be a required supplement containing a resume-style description of each advisor offering advice to clients as well as an annual summary of material changes to the form that firms will be required to provide to clients. New advisors will be required to start using the revised Form ADV Part 2 after January 1, 2011. Existing advisors with fiscal years ending December 31, 2010 will have to file with the SEC no later than March 31, 2011.
The SEC estimates that it will take firms between 15 and 60 hours to complete the form at a cost of more than $3,000. It is estimated that firms engaging outside consultants to complete the form will pay between $3,000 and $5,000. Firms engaging a compliance attorney to complete the form will pay in excess of $10,000, the SEC estimates.
While the new Form ADV Part 2 requirements create a significant new burden for RIA firms of all sizes, they've created a business opportunity for compliance consultants and software developers that inhabit the compliance realm. A number of firms have developed or are in the process of developing software to help RIAs complete the new Form ADV Part 2. One firm with a long history of supplying advisors with compliance help is National Regulatory Services (NRS), so when they contacted me and invited me to try their new Web-based Brochure Architect offering, I was happy to oblige.
Brochure Architect
Brochure Architect can be purchased as a stand-alone program for $1,200 annually or $600 if you purchase it as part of the more comprehensive NRS Guardian online compliance service. When you try to launch Brochure Architect for the first time, a Web page appears informing you that the .NET Framework 2.0 is required to run the application. Most readers will already meet this requirement, but if in doubt, there is a compatibility test.
Assuming the .NET 2.0 Framework is lacking, you can download it for free from Microsoft. Once it is installed, the site prompts you to install the NRS TextControl Wizard (additional software is required on your computer for Brochure Architect to run properly). In order to install and run the NRS applet, you must adjust your Web browser security settings to allow the NRS TextControl Wizard.
When I logged on for the first time, a pop-up alerted me that I might need .NET 2.0 and it included a link for the compatibility test, but it did not include any notification that only Microsoft Internet Explorer was required. A geek might surmise this, but the average user will not. I was under the impression that the setup software has the ability to automatically adjust Internet Explorer's security settings to allow for the NRS applet, but it didn't happen when I tried to do the installation. It is possible that my security suite blocked it, or it is possible that it didn't work. In any case, I had to go in and add www.nrs-inc.com to my list of "Trusted Sites" in Internet Explorer. Once I did that, everything seemed to work fine.
After logging on to the site, the way you access Brochure Architect may be dependent on whether you purchase it as a stand-alone product or as part of the many NRS Compliance Guardian configurations available. In my case, I went to the Tools menu, selected Brochure Architect, and launched the module. I then clicked on the "add" button to create my first brochure. I assigned the brochure a name, a date and a type. The reason for this is so that you can later update your brochure but retain all previous copies.
For larger firms with multiple branches or multiple divisions, it might be necessary to create different brochures for each. If your organization requires brochures that are similar but distinct for various offices/divisions, you can clone an existing brochure, give it a different name, and edit it as necessary rather than go through the entire process of creating a new one.