(Dow Jones) The Securities and Exchange Commission on Wednesday voted unanimously to give final approval to long-awaited rules requiring investment advisors to give clients narrative brochures containing "plain English descriptions" of the advisors' businesses, services and conflicts of interest on Form ADV Part 2.
Right now, the brochure contains advisors' responses to series of multiple-choice and fill-in-the-blank questions organized in a "check-the-box" format, which regulators believe isn't helpful.
SEC Chairman Mary Schapiro said the disclosures now will be "presented in consistent, uniform manner allowing investors to compare information between brochures, and therefore between advisors."
The rule expands the content the brochures will cover to include things like performance-based fees, investment strategies, codes of ethics and brokerage practices.
Investment advisors are grateful to see the change toward a more user friendly disclosure device.
"We've been advocating that the SEC finalize this rule for 10 years," said Investment Adviser Association General Counsel Karen Barr. "This is critically important for clients," who will get upfront disclosures about advisers' compensation, conflicts of interest, and disciplinary sanctions.
The SEC's rule comes the same day President Barack Obama signs a sweeping financial-overhaul bill that puts in place a new consumer protection bureau to curb market abuses and help retail investors decode the complex financial world.
Schapiro, meanwhile, has said she wants agency staff to make sure all public companies' disclosures are concise and easy to understand.
Putting legal disclosures into readable narratives poses some challenges for companies. "There tends to be pushback from attorneys," said Deborah Bosley, a University of North Carolina English professor who consults with companies on clarifying their corporate filings. "Attorneys are used to their own language. They're comfortable with their own language. Part of the issue now is getting them more comfortable with transparent language that is still legal."
Bosley predicted the SEC's new rule will help investment advisors win trust from their clients that may have tarnished in the financial crisis. "Some of these investment houses are going to grab onto this as a marketing opportunity," she predicted.