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ICI Objects to Proposed SEC Form Revision

The Investment Company Institute has criticized an SEC proposal that would require investment advisers to disclose custodian and administrative fees, soft dollars and disciplinary actions against them.

The ICI's criticisms were made in the trade association's comment letter to the SEC regarding its proposed changes to Form ADV, the registration form that investment advisers must update annually disclosing key aspects of their business. The comment period ended last week.

Both fund investment advisers and registered investment advisors are required to file the forms, but none of the 18 comment letters received came from a mutual fund company. Besides the ICI letter, the rest came from registered investment advisors and individual investors.

The changes that the SEC first proposed April 5 (MFMN 4/17/00) include filing the form electronically, writing it in plain English, and adding information about advisers' fees, soft dollars, disciplinary actions, as well as proxy voting rules. The SEC plans to post the forms on its website.

The commission will require investment advisers to mail updates of the forms to clients. For mutual fund investment advisers, this will mean having to mail updates to fund directors, who the commission considers to be advisers' clients. For registered investment advisors, it would mean mailing to all their customers. As a result, registered investment advisors would be more affected by the proposed changes than fund companies, lawyers said.

If the proposals are adopted, the activities of registered investment advisors would become more transparent to individual investors.

Full disclosure of fees is a sound idea but requiring investment advisors to tell a client about the range of such fees is unnecessary, the ICI wrote.

Both the ICI and registered investment advisors objected to a proposal that would require investment advisers and advisors to disclose whether employees have ever been sanctioned for violating securities or other laws, or have potential conflicts of interest with their clients.

Disclosing historical proceedings with the SEC to clients would be a double penalty for investment advisers, since advisers normally send clients notices of administrative proceedings as part of negotiations and settlements with the SEC, the ICI said. The ICI also asked the SEC not to require the disclosure of arbitration proceedings because such proceedings generally do not result in a finding of wrongdoing.

It would be "unduly prejudicial [and] invasive" for an investment adviser to have to disclose whether any of its key executives had undergone a bankruptcy proceeding within the past ten years, the ICI wrote. That would "imply that involvement in a bankruptcy proceeding is somehow indicative of that person's acumen when it comes to rendering investment advice," the ICI wrote. "We do not believe this is a fair implication [since the bankruptcy] could have been the result of . . . medical or divorce expenses."

It is also not fair to require an investment adviser to disclose whether it or any of its advisory affiliates had ever been charged with a felony or misdemeanor, the ICI wrote.

"We oppose any inquiry into such charges because . . . it is inconsistent with the presumption of innocence that underlies the U.S. legal system," the ICI wrote. "Moreover, we understand from our members that they have been instructed by their employment counsel that they may not inquire into criminal charges in hiring or retaining employees."

The ICI and advisors welcomed the SEC's proposal that they write their registration forms in plain English and have them posted on the SEC's Internet site.

Some advisors even welcomed new requirements that they fully disclose all fees- including brokerage, custody and transfer agent fees. A majority of the commenters also welcomed new requirements that investment advisors disclose their proxy voting procedures.

The commission is expected to review the comment letters over the next few weeks, according to an SEC spokesperson. If the commission approves the proposed changes to Form ADV, they will take effect in four stages beginning later this year, according to the proposed rule.

Mutual fund attorneys were not surprised that none of the comment letters came from a fund company.

"Compared to other issues, changes to Form ADV are not so critical to a fund company," said Pamela Wilson, an attorney with Hale & Dorr LLP of Boston. "They would have more of a burden on small advisers."

At the same time, the additional disclosure in Form ADV will be of some benefit to fund companies, because it will allow fund companies which sell their funds through registered investment advisors to learn if any regulatory actions have been taken against them, Wilson said. This disclosure will enable them to avoid advisors who have had trouble, she said.

Fund companies however will incur a one-time cost for rewriting Form ADV in plain English, lawyers said. Nonetheless, because fund companies already rewrote fund prospectuses in plain English in 1998 and 1999, these costs should not be too burdensome, lawyers said. They will be more burdensome for individual investment advisors, lawyers said.