May 12, 2008
With Respect to the proposed amendment of Form Adv, I have the following concerns:
• Effective Disclosure – I believe the SEC should present their draft Form ADV Part 2 disclosures to focus groups made up of retail investors to test their effectiveness. I believe these efforts will reveal substantial opportunities to improve the Proposed Amendment and create a more effective disclosure document.
• Frequent Trading – Item 8 of Part 2A would require the Brochure to include specific disclosures if an adviser engages in “frequent trading.” I believe either a definition of this term must be provided by the SEC or the specific disclosure requirement should be eliminated.
• Substantial Income or Time – Item 4 of Part 2B would require a supervised person who engages in non-investment-related business activities that provide a substantial source of their income or that involve a substantial amount of their time to disclose this information in their Supplement. I believe the SEC should define the terms “substantial source of income” and “substantial amount of time” by establishing percentages of each which would be considered substantial.
• Annual Mailing of Part 2 – The Proposed Amendment would require an annual mailing of the Brochure to all clients. I suggest that advisers be required annually to inform their clients of their right to obtain a hard copy Brochure and/or to access the Brochure and any amendments electronically through the IARD system.
• Requiring the Use of XBRL – The SEC has asked commenters to offer their opinion about whether they should require advisers to file Brochure information using a data tagging technology like XBRL. I oppose the SEC mandating the use of XBRL because we believe this requirement would be too costly for smaller investment advisory firms and of limited benefit to their clients.
The following issues are of concern in the Proposed Amendment:
• Effective Disclosure - While I understand and appreciate the SEC’s goal of providing clients with current and meaningful disclosure, the Proposed Amendment seems at odds with the findings of the RAND Study and the SEC’s recent Summary Prospectus proposal. The results of the RAND Study clearly indicate that detailed disclosure documents do not aid retail clients in their understanding of their investments and advisory relationships. In its Summary Prospectus proposal, the SEC itself acknowledges that consumers of investment products want short, concise disclosure documents. Unfortunately, the Proposed Amendment does not put these lessons into practice. Instead, it creates a long and detailed disclosure document that will likely go unread by many advisory clients who will be intimidated by its bulk. I believe the SEC should present their draft Form ADV Part 2 disclosures to focus groups made up of retail investors to test their effectiveness. We believe these efforts will reveal substantial opportunities to improve the Proposed Amendment and create a more effective disclosure document.
• Frequent Trading – Item 8 of Part 2A would require the Brochure to include specific disclosures if an adviser engages in “frequent trading.” However, the SEC fails to define the term, stating that the lack of definition will provide advisers flexibility. I believe either a definition must be provided by the SEC or the specific disclosure requirement should be eliminated. After all, if the SEC itself cannot define the term “frequent trading” then it is manifestly unfair for them to sanction firms whose definition is later determined to fall short.
• Substantial Income or Time – Item 4 of Part 2B would require a supervised person who engages in non-investment-related business activities that provide a substantial source of their income or that involve a substantial amount of their time to disclose this information in their Supplement. The SEC, however, does not define the term “substantial.” The SEC states that they “prefer instead to leave some flexibility for advisers” to determine if the activity is a substantial source of income or demand on the supervised person’s time. I believe the SEC should define the terms “substantial source of income” and “substantial amount of time” by establishing uniform definable percentages for each. We believe this approach will provide advisers with the regulatory certainty they need to prepare the Supplement with confidence.
• Annual Mailing of Part 2 – The SEC indicates that delivering an updated Brochure annually to clients will create an annual burden of 253.25 hours per advisor. However, most investment advisers report that clients do not want and will not read an annual updated Brochure. As a result, I suggest that advisers be required annually to inform their clients of their right to obtain a hard copy Brochure and/or to access the Brochure and any amendments electronically through the IARD system. If the SEC insists upon an annual mailing, I suggest that the mailing consist of a summary of material changes together with information on how clients may obtain a hard copy Brochure via the IARD or by contacting the adviser.
• Requiring the Use of XBRL – In the Proposed Amendment, the SEC asks for comments about whether they should require advisers to file brochure information using XBRL. XBRL is a language for electronic communications of business and financial data that allows for the tagging of data to facilitate the preparation, publication, and analysis of that information by software applications. I oppose the SEC mandating the use of XBRL because I believe this requirement would be too costly for smaller investment advisory firms and of limited benefit to their clients.
Gary D. Case, CFP®
Cornerstone Financial Planning