Plain English Made Simple
New SEC requirements that financial advisors create a plain-English, narrative version of Form ADV Part 2 take effect on October 12, although the final compliance deadline isn't until March 31, 2011. Either way, some folks say it's time for advisors to brush up on their writing skills to avoid mistakes that could delay registrations or encourage increased scrutiny from regulatory examiners.

During the summer, the SEC adopted new rules for Form ADV, which is used by investment advisors when they register with both the SEC and state securities regulators. Part 1, which contains information about an advisor's education, business and disciplinary history during the past ten years and is filed electronically with regulators, will retain its check-the-box format.

But Part 2, or the advisor's brochure, provides more detailed information about an advisor's services, fees and investment strategies for both regulators and potential clients, and no longer will include the check-the-box and multiple-choice format. Instead, a two-part all-narrative brochure will be required. Part 2A is the firm's main brochure and contains 18 different disclosures about the advisory firm. Part 2B is the brochure supplement that provides specific information about the people at the firm who dispense investment advice.

Some advisors believe the new format is unnecessary, particularly since they already explain aspects of their business in narrative form on Schedule F of Form ADV. "Check boxes make it easy for people to understand things, and now they're taking that away and I don't think that's helpful," says Jennifer Cray, a partner at Investor's Capital Management LLC in Menlo Park, Calif. Nonetheless, she adds, the firm's outside consultant will do much of its ADV drafting. "I've delegated all of the worrying to him."

The SEC estimates the brochure will require 15 to 60 hours to complete and cost advisory firms using outside consultants between $3,000 and $5,000 to create. William Lutz, a retired English professor at Rutgers University who helped write the SEC's Plain English Handbook, believes the SEC's time estimate is underestimated. "You have to consider the various constituents who could get in there and muck it up," he says, referring to possible complications regarding legal and compliance departments.

But Zachary Gronich, CEO of RIA In A Box, a compliance consulting firm in New York City, says the financial costs might be overstated. He says his company charges $525 to draft Part 2A for each firm, and $95 for each Part 2B that covers affected individuals at a firm. "If you have a ten-person firm, that's only about $1,500," he says. 

Gronich expects all state securities boards to eventually adopt the new rules.

 Writing ADV Part 2 in plain English (Schedule F has been eliminated) is aimed at helping clients get a clearer picture of how advisory firms operate. But some consultants say not all advisors possess the knack for crisp, clean writing.

"When advisors do form ADVs by themselves, it's often raw and rough with bad grammar and silly typos," says Nancy Lininger, a compliance consultant at The Consortium in Camarillo, Calif. "And sometimes the answers are short and insufficient. Or they go the other way and get very technical into their philosophy and they talk in terminology that investors often don't understand.

Among other things, the Plain English Handbook suggests using the active voice with strong verbs, personal pronouns and short sentences, and omitting superfluous words and jargon. The phrase "modern portfolio theory uses plain English words," Lininger says. "But when you put them together, does the investor understand what that means?"

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