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Delay in Revision of Key Form is Expected


The SEC is considering delaying revisions to the principal form investment advisors must file concerning their business practices because of objections raised to the proposed revisions.

The SEC may delay adopting changes to Part II, the narrative section of form ADV, in order to review, "a number of critical comments we have gotten with regard to disclosing disciplinary actions against investment professionals, soft dollars, fees, allocation and proxy voting," said Cindy Fornelli, an advisor to the director of the division of investment management at the SEC. "We would like time to properly analyze these comments, which we take very seriously."

However, the division has no intention of recommending that the SEC drop its proposed changes to Part II, Fornelli said. Ignites.com, a website carrying news of the mutual fund industry, reported recently that the division planned to recommend that the SEC do so.

The SEC plans to begin requiring electronic filing of Part 1 of the form through its new electronic delivery system in the beginning of 2001 but may not require investment advisors to submit Part II until some time after that, Fornelli said.

The SEC is anxious to go ahead with the first part because of the fee revenue it will bring to the commission, Fornelli said. The SEC needs these funds to cover the cost of the electronic delivery system it built for the forms.

Form ADV is the registration form that investment advisors must update annually to disclose key aspects of their business. Part I contains the investment advisor's name, address, name of a prime contact person, as well as education and business background information on all of the principals, including any disciplinary actions taken against them within the past two years.

The industry, including the Investment Company Institute, has criticized some proposed changes to Part II. Fund companies have objected to having to disclose custodian and administrative fees, soft dollars and disciplinary actions against them within the past ten years. The ICI also objected to a requirement to disclose disciplinary actions against individual members of an investment advisor in Part I. (MFMN 6/19/00)

The new Form ADV would require investment advisors for the first time to explain their proxy voting procedures, Fornelli said. It would also formalize disclosure on disciplinary actions taken against firms and their key employees and on bankruptcies, Fornelli said.

The SEC usually asks firms to disclose disciplinary actions to their customers while a firm is negotiating a settlement with the SEC, Fornelli said. Requiring investment advisors to include disciplinary action information in Form ADV would make customers more aware of those actions, since firms would be required to mail Part II of Form ADV to their customers annually, Fornelli said.

The new Form ADV would also ask "much more pointed and specific" questions about personal trading, allocation and soft dollar arrangements than the current Form ADV, Fornelli said.