June 13, 2000

BY HAND AND ELECTRONIC FILING

Mr. Jonathan G. Katz
Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609

Re: Release Nos. IA-1862, 34-42620; File No. S7-10-00; Electronic Filing by Investment Advisers; Proposed Amendments to Form ADV

Dear Mr. Katz:

The Investment Counsel Association of America¹ appreciates the opportunity to provide these comments regarding the Commission's proposed rules related to electronic filing by investment advisers and revisions to Form ADV.²

Introduction and Summary

On April 5, 2000, the Commission announced the development of an electronic filing system for investment advisers, the Investment Adviser Registration Depository (IARD). The Commission also proposed substantial amendments to Form ADV, designed to modernize the registration process and enhance information that investment advisers provide to their existing and prospective clients. As part of this enhanced disclosure, a firm would be required to provide clients with a narrative brochure in plain English describing its practices, policies, and procedures, along with brochure supplements providing additional information regarding specific employees of the firm.

The ICAA applauds the Commission for establishing the IARD. This electronic filing system will permit federally registered advisers to make "one-stop" filings with both the Commission and with states in which they are required to notice file.³ It will provide the Commission with a powerful tool to monitor advisers and gather useful data about the profession. Most important, the database will provide clients around the world with easy access through the Internet to significant information about investment advisers, including disciplinary history.

The ICAA also supports the Commission's goal of making advisory firm brochures more useful to clients. Form ADV has not been substantially amended since 1985 and is in need of modernization. We support the new requirement of a narrative brochure written in plain English as a logical and meaningful step toward improving disclosure for clients.

While agreeing with the Commission's investor protection goals, the ICAA has a number of comments regarding electronic filing and the new structure and substance of Form ADV. Following is a summary of our principal concerns:

• Proposed Form ADV is too extensive. Preparing proposed Form ADV, as a whole, will amount to a costly and burdensome task for investment advisers. The information required in Part 1 and Part 2 has been significantly expanded both in detail and in scope. In particular, we are concerned that:

• The disclosure and delivery requirements appear to be most relevant to advisory firms and financial planners serving individual retail clients. Many of the proposed changes will have limited or no relevance to institutional clients, while imposing burdens on institutional advisers.

• The proposed brochure will be too lengthy and dense for retail clients to read or understand (somewhat similar to a prospectus). Accordingly we have proposed a more streamlined version of the brochure.

• The proposed form is unwieldy. An SEC-registered adviser will have to collect and manage information and drafting for Part 1A, Schedule A, Schedule B, Schedule D, Part 2A, Part 2B for many employees, the execution page, and various delivery requirements.

• The proposed delivery requirements are too cumbersome. The Commission proposes to require advisers to (a) continuously deliver "stickers" to clients when Form ADV is amended, (b) create summaries of material changes and track which summaries were delivered to which clients on particular dates, and (c) make an annual offer of a "clean" brochure. These requirements may be confusing to investors and will involve a substantial administrative effort by advisers. Below, we propose a simplified delivery regime.

• The proposed brochure supplement is not feasible. The brochure supplement (Part 2B) presents similar issues and problems. Although the Commission anticipates a one-page disclosure for each relevant employee, it may not realize the operational difficulties of such an approach for firms with more than a few employees. Drafting, delivering, and constantly amending the supplements will be extremely costly and burdensome for firms with a significant number of employees and clients. Below, we propose two workable alternatives to the supplement concept.

• The Commission appears to be requiring new legal duties. The proposed brochure requirements to discuss policies, practices, and procedures related to a wide range of topics appear to create legal duties that have not been previously articulated.

• The Commission should not use broker-dealer regulation as a model for investment adviser requirements. The SEC appears to have taken Form BD and its related definitions as the model for Form ADV. This approach is inappropriate in certain circumstances.

We discuss below: (1) electronic filing through the IARD; (2) the Release and Form ADV generally; (3) Part 1A generally; (4) the proposed delivery requirements for Part 2; (5) Part 2A generally; and (6) Part 2B generally. For ease of reference, we have set forth our specific item-by-item comments with respect to Part 1A, Part 2A, and Part 2B in separate appendices that should be considered as part of this comment letter.

I. Electronic Filing through IARD

A. Transition timing

The Commission requests comment on the transition process and the timing of filing Form ADV and delivering the brochure to clients.⁴ Gathering the information for Part 1 alone will involve significant time and effort. We believe advisers will need at least 60 days to complete Part 1. In addition, if the Commission does not narrow the scope and extent of the brochure and brochure supplements, drafting such documents will be an enormous undertaking. Advisers will need at least 180 days to gather the necessary information and create these documents and an additional 60 days to deliver new brochures and supplements to all clients.

In addition, we understand that filings with the states through IARD for investment adviser representatives may overlap with the schedule for filing Part 1A and/or Part 2A. We hope the Commission and the states will work together in the transition schedule to avoid overlapping or impractical requirements.

B. Paper filing of the brochure with the states

The SEC proposes to "roll out" Part 1 of Form ADV on the new IARD approximately one year before Part 2A is filed electronically.⁵ In the interim, the Commission will not require SEC-registered advisers to file Part 2A with the Commission, but simply to provide Part 2A to their clients.⁶ Because the Commission will not require the filing of Part 2A during this period, states would not be permitted to require Part 2A in notice filings by SEC-registered advisers.⁷

The SEC has proposed to "accommodate" the states' desire to receive Part 2A by "deeming" Part 2A to be filed with the Commission.⁸ Thus, during the initial one-year roll-out period, advisers would be required to file Part 1 electronically with the SEC and the relevant states, while notice filing Part 2A on paper by mail with the various states that so require.

We strongly oppose this proposal. Requiring Part 2A on paper would be unnecessarily burdensome for firms already completely revising their Form ADVs and becoming familiar with the IARD. Further, Part 2A already must be provided to clients and prospective clients, so there is no investor protection rationale for the requirement. States will have all of the regulatory information they need in Part 1, including disciplinary history. We see no legitimate "notice filing" need for states to require advisers manually to file a copy of Part 2A, particularly where it is a stop-gap measure until the IARD is completed.⁹

C. Completeness check

The Commission notes that the system "will prevent an adviser from submitting an incomplete form or from entering inconsistent information at different places on the form."¹⁰ We understand that broker-dealer firms have had problems with the CRD's completeness checks, especially with errors in the system that prevent timely filing by firms. Apparently, the system sometimes rejects forms that are correctly completed because of assumptions made in the system that do not apply to all firms. It is important that the Commission control the completeness check function of IARD for Form ADV, not NASDR or the states, and that the system is flexible enough to be quickly adapted if errors are discovered in how the checks operate.

D. Commercial use

The Commission notes that IARD data will be available for commercial use.¹¹ We believe such commercial use of regulatory information is highly unusual in any profession, particularly given that personal information about certain advisory personnel is included. For example, we understand that CRD data is not similarly available. At a minimum, the Commission should ensure that private information, such as social security numbers and home addresses or telephone numbers, is not provided to commercial users.

II. General Comments on Form ADV

A. The IARD Should Be Tailored to Investment Advisers

NASDR is building the IARD for the Commission and the North American Securities Administrators Association (NASAA). We appreciate Chairman Levitt's statement that "NASDR will be operating in this venture as a contractor for [the SEC] and not as a self-regulatory organization for investment advisers."¹² We are nonetheless concerned that certain portions of the Release appear to focus more on attempting to conform Form ADV to Form BD and to accommodate dually registered entities than on establishing requirements that reflect characteristics of the advisory profession.

As we have stated consistently,¹³ there are significant differences between the investment adviser profession and the broker-dealer industry. Nevertheless, the Commission appears to have used Form BD and its accompanying definitions as the model for Form ADV. For example, the Regulatory DRP (Disciplinary Reporting Page) contains questions completely unrelated to the investment advisory profession, referring to products, sales practices, and SRO-type sanctions. Similarly, the form includes questions about registered representatives and "minor rule violations."¹⁴ This approach is not appropriate for advisers. To the extent questions relate to dual registrants, the Commission should already have access to such information through broker-dealer filings.

We understand that the SEC hopes to achieve "synergies" in filing for dual registrants. But we believe that an accurate and appropriate form for advisers should not be sacrificed in the name of easing filing requirements for dual registrants. Historically, "true" dual registrants - that is, one entity registered as both an investment adviser and broker-dealer - are principally broker-dealers who decide to enter the investment advisory profession. Traditional investment advisers who register as broker-dealers do so, for the most part, to distribute proprietary mutual funds and create an affiliate or subsidiary to do so. We understand, however, that only "true" dual registrants will benefit from the synergies of linking the IARD with the CRD. Thus, aspects of this proposal that make Form ADV more consistent with Form BD primarily will benefit the broker-dealer industry, not traditional investment advisers.¹⁵

We are also concerned that the Release appears to indicate that NASDR has authority to set fees for various filings and to issue future releases.¹⁶ Only the SEC and the states have such authority. The Release and proposed Form ADV are sprinkled with references to CRD numbers throughout, when there should be a separate IARD number for this separate system.

B. The Paper Version of Form ADV

We are disappointed that the Commission chose to release only the paper version of proposed Form ADV, which is not relevant to the vast majority of advisers. Few, if any, federally registered advisers will apply for hardship exemptions to use the paper form. It is clear that the on-line version of the form will not be identical to the paper version. For example, while the Release mentions electronic signatures, the proposed form does not. In addition, we understand that Schedule C will not exist on-line, but the Release does not make that clear. Similarly, Schedule D may not appear in the same manner on-line as it does in the proposal. The Commission should make clear which items, if any, may be amended directly on-line, without accessing various schedules.

Further, advisers need to see the instructions that will be available on-line in order to provide relevant comments. The ease with which the form can be completed on-line is critical to the success of the new system. We are concerned that firms will have to expend additional resources if the paper form does not match up with the on-line version. We understand that with respect to the current Form BD in the CRD system, the two versions (paper and electronic) are not identical, which is a source of confusion and lack of consistency in firm information and filing. We believe the Commission should identify and clarify any discrepancies between the paper and electronic versions of Form ADV.

C. Disciplinary History

We commend the Commission for incorporating requirements of Rule 206(4)-4 into the brochure. Clients generally consider disciplinary history in making decisions about their adviser and clients should have access to this information. We are concerned, however, that the disciplinary history required is unnecessarily detailed and repetitive across various parts of the form. We do not believe that Form BD and its accompanying DRPs should be used as models for investment adviser disclosure. Further, some questions are overly intrusive and irrelevant, particularly those requesting information about charges that did not result in findings of guilt or liability. Our item-by-item commentary on these questions is provided in the relevant appendices.

The SEC has requested comment regarding whether disciplinary information should appear in a separate document.¹⁷ We strongly believe this information should not be required in a separate document. The logistics involved in delivering three or more documents (brochure, disciplinary history, one or more supplements) as well as the recordkeeping requirements would be extremely complicated. In addition, clients know to look for disciplinary history. The table of contents required by the proposal would immediately direct clients' attention to the correct location.

The Commission has also requested comment on whether SEC-registered advisers should be required to report arbitration liability in excess of $2,500.¹⁸ We believe that requiring disclosure of arbitration claims or awards would be inappropriate. As the Commission points out, it is not always possible to identify arbitrations that reflect upon the integrity of the adviser, as opposed to arbitrations of commercial matters to which a large adviser, like any other corporation, may be subject. In any event, if such a disclosure requirement were adopted, the proposed disclosure threshold of "in excess of $2,500" whether that is the amount of the claim or the amount of the award, is too low. This de minimis amount may not be material even for a small state-registered adviser, much less a large adviser with substantial staff, clients, and assets under management.

D. State-related issues

In its description of the electronic filing system, the Commission implies that many states require an SEC-registered adviser "doing business" in the state to provide a notice filing.¹⁹ In fact, however, all but four states require notice filings only if an adviser has a place of business in the state or more than five clients in that state.²⁰ We believe that the Coordination Act was intended to and did codify that de minimis requirement for notice filing. In any event, we anticipate that federal legislation currently under consideration will confirm that intent. We respectfully request that the final release correctly describe the states' notice filing requirements.

In the General Instructions for Part 2 of Form ADV, instruction number 5, the Commission asserts that for notice-filers, the "state securities authorities require you to send them paper copies of your brochure until the IARD system is capable of accepting these filings." This explanation should read that states "may require" such filings. Under the Commission's proposal, each state may determine whether or not to require paper filings during this period.²¹

In addition, the Commission proposes a rule amendment that would suspend preemption of a state's laws when the adviser registers with that state.²² We understand the Commission's rationale for this proposal but caution against unintended consequences. Currently, some SEC-registered advisers may voluntarily register with a state because anachronistic pension laws in certain states require advisers to be registered with both authorities, despite the passage of the Coordination Act, and clients insist on complying with the letter of state law.²³ These advisers should not be subject to state regulation.

Finally, the Commission should note in Item 9 of the General Instructions that once an adviser registers with the SEC, it may withdraw its registration(s) from the state(s).

III. Part 1A

Part 1A will be the principal regulatory information-gathering form for the SEC. This part of the form has been greatly expanded. It incorporates most of the information requested in current Part I and also includes some information that is currently in Part II. The information requested in Part 1A is, for the most part, straightforward, and the Commission has included helpful instructions and a glossary of terms. Several questions, however, still ask for excessive or unnecessary detail, and the purpose of gathering the information in this document is unclear. Our item-by-item commentary discussing these issues appears in Appendix A.

Further, proposed Form ADV frequently requests the same or similar information in multiple questions. For example, disciplinary history for certain personnel is disclosed in Part 1A and the DRPs and is repeated in the brochure and/or brochure supplement. The same wrap fee information requested in Part 1A is repeated in the brochure. This repetition is burdensome to the adviser and makes the disclosure documents too complex and unwieldy for clients. The SEC ultimately will receive both Part 1A and the brochure, and therefore should eliminate the duplication.

The Commission estimates that the average time an adviser will spend on creating Form ADV is 22 hours. We believe this estimate is low even for small firms and it is not remotely realistic for large advisers with a broad client base, expanded product lines, numerous affiliates, and complex policies and procedures. The required disclosures in both Part 1A and Part 2 regarding products, people, and policies per product will be proportionately greater the larger and more complex the organization. Particularly given the consequences of "inadequate" or inaccurate disclosure that could result in enforcement actions, any large complex organization will expend substantial resources on multiple layers of review and information-gathering, including review by outside counsel.

IV. Part 2: Delivery Requirements

Currently, each adviser must deliver its brochure or Part II of Form ADV at the inception of the advisory relationship and offer to deliver the brochure or Part II annually. At the same time, an adviser is required to update Form ADV either promptly or annually depending on the item to be amended. The updated Form need only be sent to clients that request the Form pursuant to the adviser's annual offer. We agree that the current system is ineffective, particularly because the vast majority of clients do not request the updated Form pursuant to the annual offer.

To address this problem, the Commission's proposal would require that advisers not only amend their brochures to reflect material changes, but also deliver a reprinted brochure or "sticker" to every client and prospective client every time the brochure is amended. Under the proposal, firms would also have to summarize separately the material changes in the brochure for clients and keep records of each summary and when it was delivered to clients. The proposal would also retain the current requirement of an annual offer.

We believe that public access via the Internet to the adviser's most up-to-date and complete Form ADV goes a long way toward improving the current situation. In lieu of the Commission's delivery/stickering proposal, we strongly recommend that Rule 204-3 be amended to require the annual delivery, not offer, of an adviser's current brochure to existing clients.²⁴ Delivery should be accompanied by prominent language disclosing that the brochure may be amended from time to time during the year, and that clients are advised periodically to check the listed website for any changes. We are confident that clients sophisticated enough to retain the services of a federally registered investment adviser have ready access to the Internet. The brochure could also be accompanied by a summary of material changes made to the brochure since the last delivery. The concept of an "offer" is no longer useful and should be eliminated. Of course, as is currently required, an adviser must provide prospective clients with its most current brochure filed with the SEC. Our proposal addresses only delivery, not filing requirements.

We understand and support the Commission's desire to keep clients apprised of material developments related to their advisers. We believe, however, that the Commission's proposals related to "stickering" and "summaries of material changes"²⁵ will be confusing to clients and overly burdensome for advisers. These proposals defeat the purpose of creating a continuously current electronic database available to the public. Our proposal of delivering a clean updated brochure to clients on an annual basis will accomplish the Commission's goals while improving the clarity of disclosure.

V. Part 2A

A. The Brochure Will Be Too Long and Dense

Part 2A requires all investment advisers to draft a firm brochure in a plain English, narrative format. In essence, it replaces information currently provided in Schedule F, the continuation page for current Part II of Form ADV. Advisers will provide narrative disclosure on 19 separate items. While the nature of the disclosure has been specified in the proposal, advisers generally will be free to structure the disclosure and order the topics so that it best conveys the required information.

We agree that the current "check-the-box" format is not user-friendly to clients. However, the proposed brochure is not merely reformatted but also requires a much higher level of detail regarding more topics than the current version. The brochure would have to include a firm's policies, practices, and procedures regarding the firm's business activities, ownership, fees, compensation, types of clients, methods of analysis, investment strategies, risks of loss, disciplinary information, financial industry affiliations and activities, personal trading, brokerage practices, soft dollars, commission recapture, allocation, account review, custody, wrap fee programs, investment discretion, proxy voting, performance advertising, and other financial information. While each item alone may sound reasonable, taken as a whole the rule appears to require advisers to prepare quite a substantial and detailed document that will be more than a "brochure." The requirements are even further complicated for large firms, where, for example, there may be different policies and procedures in various areas for each investment strategy.

Moreover, proposed Form ADV appears to require disclosure and delivery most relevant to financial planners and large wirehouses serving individual retail clients. Unfortunately, these retail clients have no reliable way to assess whether the policies and procedures disclosed by advisers are effective or consistent with legal or professional standards.²⁶ Conversely, many of the proposed changes have limited relevance to the vast majority of institutional clients that typically are represented by sophisticated consultants. Through the RFP process, due diligence meetings, and the assistance of consultants, institutional clients are able to obtain as much detailed information about an adviser that they feel is necessary, including information about the individuals who will be managing their assets.

While we support the concept of a plain English brochure for clients, we believe the scope and extent of disclosure requested is excessive. The proposed brochure will be too lengthy and complicated for clients, particularly the type of retail client the Commission targets. Currently, without the additional items and detail proposed in the Release, many firms' Part II disclosure exceeds 10 or 20 single-spaced pages. The possibly unintended consequence of the proposal (especially with the "stickering" concept) is to transform the brochure into a mutual fund-like prospectus, which many investors will not read.²⁷ A narrative brochure that is likely to be in excess of 20 or 30 pages will not achieve its intended goal of providing clients with important information in an easy-to-read format.

B. The Brochure May Create New Legal Obligations

Investment advisers already make disclosures regarding many of the topics listed in proposed Part 2A. The Release, however, requires a new level of detail for each topic, as well as repeated requests for descriptions of policies and procedures. We are concerned that the requirement of policies and procedures for every potential issue that may conceivably arise implies a new regulatory regime that has never been properly proposed, reviewed, and approved. If so, this relatively short comment period is not sufficient to respond. Previously, the Office of Compliance Inspections and Examinations has urged investment advisers to adopt internal controls to give examiners confidence in the adviser and to streamline examinations (so-called "smart" exams).²⁸ It has not previously been suggested that advisers must have these policies and procedures in place as a matter of law. We are aware of no violation of law that would occur, absent other specific violations, based on lack of policies and procedures alone regarding any particular topic (other than insider trading).²⁹ Should the Commission desire advisers to have such policies and procedures - for example, to adopt a code of ethics, a requirement the ICAA strongly supports³⁰ - it should propose regulations for comment in due course.

C. The ICAA Proposes An Alternative Approach

We propose an alternative approach to improve disclosure to clients. As is currently the rule, the Commission should require investment advisers to succinctly discuss potential conflicts of interest and certain other items listed in proposed Part 2A, but should not require details regarding the firms' policies and procedures for each topic. Instead, the adviser should prominently and explicitly offer to provide further information about the firm's policies and procedures to any client upon request. We believe that a simple, clear 10-page document is all that a client would or should be expected to read. In our item-by-item comments listed in Appendix B, we discuss areas in which disclosure could be streamlined.

To supplement and explain the information presented in firm brochures, the Commission could prepare an educational brochure for advisory clients, discussing in plain English potential conflicts of interest and suggesting questions to ask advisers or prospective advisers. The Commission recently issued such a booklet explaining variable annuities and suggesting questions to ask before investing.³¹ The Commission has also created a web page entitled Protect Your Money, which advises prospective clients to obtain advisers' and brokers' disciplinary history and to ask advisers to deliver both Part I and Part II of current Form ADV.

We understand that the Commission believes that conflict of interest information is specific to each firm and hopes that disclosure will not be boilerplate. But realistically, some boilerplate is inevitable because certain potential conflicts of interest and policies are fairly common across the profession, necessitating similar disclosure.³² Common issues that could be explained in the SEC's brochure include soft dollars, directed brokerage, commission recapture, fees, compensation, personal trading, risk of loss, and custody.

Advisers could be required to provide the SEC's educational brochure to each prospective client. Or the Commission could display the brochure on its website and direct firms to alert clients to it. The ICAA would be pleased to assist the Commission in drafting such a booklet. The Commission's explanation of Part 2A in the Release already is a significant step in that direction.

VI. Part 2B

Part 2B is a newly required "brochure supplement." The Commission proposes to eliminate current Schedule D and instead require firms to provide each client with a supplement that describes the advisory personnel who (a) regularly communicate investment advice to that client or (b) formulate investment advice for that client (unless part of a team or committee) or (c) make discretionary investment decisions for the client's assets.³³ The intent is to provide a client with useful information about the employees relevant to that client, rather than general information about the executive officers or members of an investment committee of the firm. While this intent is laudable, we describe below its logistical difficulties, as well as alternative approaches. An item-by-item discussion of Part 2B as currently proposed is located in Appendix C.

A. Part 2B is not feasible

The brochure supplement concept may be well-tailored to small advisory firms, but is unrealistic and unworkable when applied to large organizations. In small advisory firms with only a handful of supervised persons, drafting, reviewing, delivering, and amending brochure supplements for a finite number of persons may be feasible. In larger organizations, however, it would be an administrative hardship to draft, deliver, and update brochure supplements for hundreds or even thousands of supervised persons, not to mention the obligation to track delivery of the supplements. For example, one client of a large investment adviser could have several portfolio managers for different market sectors providing advisory services to the account, several individuals communicating the portfolio managers' actions or investment advice to the client, and a marketing or relationship employee also in contact with the client. Thus, a firm could be required to send close to a dozen brochure supplements, in addition to a lengthy brochure, to one client.

Not only will large advisers have difficulty complying with the initial drafting and delivery requirements, but also with the continuing obligations proposed. Advisers will be obligated to send supplements for new employees servicing an account, sticker existing supplements, and to maintain books and records to track delivery, offers, and amendments. The relatively frequent addition of a new portfolio manager or internal reorganization of staff will trigger several mailings. The administrative obligations alone would force extensive system changes to track which clients get which brochure supplements, when an offer to deliver was made, and when and which subsequent amendments or stickers were mailed - all on a client-by-client and employee-by-employee basis.

B. Alternative approaches are preferable

In support of the Commission's investor protection mandate, we suggest two alternative approaches to brochure supplements. We believe both of these approaches are more in line with operational realities than the current proposal, yet will still provide comparable investor protections and meet client needs. First, we recommend that investment advisers provide disciplinary information for all management and investment personnel in the brochure, proposed Part 2A. In the alternative, though less preferable, we suggest that the rule require investment advisers to deliver brochure supplements only to retail clients.

1. Expanded Part 2A

As an alternative to brochure supplements, the Commission should require important information be provided to clients about firm personnel in Part 2A rather than in a separate brochure supplement. Part 2A could be expanded to include disciplinary history for all employees who formulate advice for clients, not just for "management persons" as currently proposed.³⁴ The disciplinary history of other employees will already be available through the Internet both in Part 1A and in the Forms U-4 filed by "investment adviser representatives" with the states. The expanded disclosure in Part 2A could be coupled with a prominent offer to provide additional information not only about the persons formulating advice, but also about any employee involved in the advisory process. This could yield more information about more employees than is currently proposed.³⁵

Of the seven disclosure items in the brochure supplements, disciplinary information is by far the most important to advisory clients, a position with which the Commission concurs.³⁶ Indeed, we believe that disciplinary history is more important and understandable to clients than the detailed policies and procedures proposed to be disclosed in the brochure. Under our proposal, the revised Part 2A disciplinary information disclosure item would require disclosure for all persons who determine or formulate general or specific investment advice, regardless of whether they are part of an investment committee. If disciplinary information for management and persons who formulate advice is included in the brochure along with a prominent offer to provide additional information upon request, we believe that clients will have the most vital information disclosed to them and access to any other information they deem necessary.³⁷

The prominent offer of identified additional information could state in plain English:

Additional information on any employee of the firm involved in the advisory process is available, including educational background, business experience, additional business activities, and general compensation policies other than salaries. This additional information is available upon request by calling ( ) ___-____, emailing a request to ___@___ or by mailing a request to ____.

Under this alternative, an advisory client would have immediate access to the most important disclosures - disciplinary information - for the most important advisory personnel - those persons deciding how to invest the client's assets. The client would also have available, upon request, additional information regarding employees involved in the advisory process.³⁸

2. Brochure Supplements for Retail Clients

An alternative, though much less preferable, approach would be a requirement that brochure supplements be delivered only to retail clients - the type of client targeted by the Commission with the brochure supplement concept. Mandated disclosures are not necessary for sophisticated clientele, who often request specific information from investment advisers regarding advisory personnel. Providing brochure supplements to sophisticated clients will not significantly decrease the number and type of inquiries such clients pose to advisers, while greatly increasing the burden on advisers.

The ICAA strongly suggests that the Commission define retail clients as natural persons other than "qualified clients" as defined in Rule 205-3 under the Advisers Act. Thus, in general, retail clients would be natural persons who do not have a net worth of $1.5 million or $750,000 in assets under management of the adviser. Creating a dual standard for sophisticated clients and retail clients is consistent with other Commission rulemakings, such as the definition of "investment adviser representative" issued to implement the Coordination Act³⁹ and the rules governing performance fees.⁴⁰

Similar to our first suggested approach, the brochure supplements should be prepared only for persons who actually formulate advice, including those who make discretionary investment decisions for clients. Many of these employees serving a retail clientele will fall under the definition of investment adviser representative and will be registered with the state securities commissions. Firms already have to prepare filings (Form U-4) for such individuals with the states. These filings include much of the same information that would be required in the brochure supplement. The Commission could permit firms to deliver Form U-4 to clients voluntarily in lieu of the supplement, so as not to require duplicative efforts.⁴¹ This approach will provide retail clients with significant information about the persons providing them counsel.

CONCLUSION

In closing, we commend the Commission for issuing this historic proposal. This rulemaking encompasses perhaps the most significant changes in the investment adviser registration and disclosure regime since enactment of the Investment Advisers Act of 1940. With appropriate modifications, we are confident that the Commission's proposal will significantly enhance the level of relevant and useful information for investors, provide the Commission and the states with an unprecedented amount of data regarding individual advisers and the advisory profession, and allow investment advisers to achieve efficiencies in meeting their registration and notice filing obligations. We would be pleased to work with the Commission's staff in drafting language to modify appropriately the proposed revisions to Form ADV. Please do not hesitate to contact us if we may provide additional information or clarification to the Commission regarding any of these matters.

Sincerely,

KAREN L. BARR
General Counsel

Cc: The Honorable Arthur Levitt
The Honorable Norman S. Johnson
The Honorable Isaac C. Hunt, Jr.
The Honorable Laura Unger
The Honorable Paul R. Carey

Paul F. Roye, Esq.
Robert E. Plaze, Esq.
Marc D. Beauchamp

APPENDIX A
Specific Comments on Part 1A

Glossary

• We suggest that the term "material," which is used throughout Part 1A, be defined. Advisers could use further guidance in making these determinations.

Item 1 Identifying information

• E. The question should ask for either a CRD number or an IARD number or both. This change would also need to be made on the top of each page.

• J. We believe that information relating to the contact employee should not be made available to the public if it is only being requested for regulatory purposes. Is there a way to "protect" this information on the IARD?

Item 4 Successions

• The instructions here indicate that a firm should leave this item blank if it has already reported the succession on a previous filing. Leaving the item blank may cause a problem in the completeness check. We suggest that a firm in this situation be instructed to check the "no" box.

Item 5 Information about your advisory business

• A and B. The term "independent contractor" should be defined in the glossary of terms in the instructions. Who is the Commission trying to reach with this request? If the Commission is using IRS guidelines, it should so state. The Commission could also clarify that the term does not include persons who simply receive referral fees.

• B(2). We propose that the question about registered representatives be solely limited to employees because advisers currently are not required to track this information with respect to third party solicitors and other independent contractors. In any event, this information does not seem relevant or necessary even for employees.

• D. We suggest that the question about types of clients be eliminated. It is unclear what this data would be used for and it is difficult and time consuming for large investment advisers to categorize client accounts in this manner.

• F(1). The term "securities portfolios" should cross-reference the definition in Section 5.b.(1) of the instructions for Part 1A.

• H. The question about the number of financial planning clients does not seem important and should be eliminated.

• I. We strongly object to providing a list of all wrap fee programs and sponsors. This information may prove extremely lengthy and burdensome for firms with an extensive wrap fee business and may require somewhat frequent updating if the Commission deems this list material. We are certain that listing the programs and sponsors here will not eliminate a duplicative request for the same information, plus all related documents, from inspection staff during examinations.

Item 6 Other business activities

• A. Items A(2) and (7) are inapplicable to a firm and should be eliminated.

• B(3). This question will be difficult for an adviser to answer unless it is further clarified. If the adviser sells interests in a private investment company, should the adviser check "yes" or "no"?

Item 7 Financial industry affiliations

• The Commission should clarify why it has broadened the definition of "related person" to include persons providing investment advice on behalf of the adviser and what type of information it seeks to capture with the definition. More guidance is needed to apply the definition in the context of a wide range of firm structures.

• A. Questions (6) and (7) seem to call for irrelevant detail, e.g., whether a person is a lawyer or accountant. Questions (9), (10) and (11) seem appropriate for Item 6 with respect to the adviser itself, but there is a high likelihood of error when extended to persons falling under (3) and (4) of the definition of related persons.

• B. This question calls for impossible detail when extended to persons falling under (3) and (4) of the definition of related persons. It is unclear what this data would be used for. In addition, we suggest that the question be limited to "investment-related" limited partnerships.

Item 9 Custody

• The Commission should clarify whether advisers with constructive custody need to answer this question and, if so, consider whether a "yes" answer here would cause confusion.

Item 11 Disciplinary information

• A firm is required to provide disciplinary information about advisory affiliates. The scope of the definition of "advisory affiliates" is unclear. We are particularly concerned about the universe of personnel who may be required to make these disclosures because the proposed Form ADV deletes the language excluding from the definition persons who perform "support or similar functions" found in current Form ADV. This deletion raises the question of whether persons functioning in professional capacities in a support role are included in the definition of advisory affiliate.

• Subsections A and B would require the firm or advisory affiliate to disclose any felony charge or a charge of any misdemeanor listed on item 11B(1). We strongly object to the required disclosure of a charge that is not currently pending or did not result in a conviction or a guilty or nolo contendere plea. Unfortunately, many individuals are charged with crimes they did not commit. These charges are often dropped promptly when the error is discovered or, in some cases, the person is fully acquitted by a court of competent jurisdiction. It is inappropriate to require disclosure of events of this sort. Any disclosure of charges that have not resulted in a conviction or a plea of guilty or nolo contendere should be limited to pending charges as currently required on Form ADV, Item 11G. We understand that the Commission may have proposed this question to conform Form ADV with Form BD. However, amending Form BD to eliminate this question is the more appropriate conforming action.

• We fully support limiting disciplinary history to 10 years. However, the directions that follow Item 11 should be moved to the beginning of this section. In its current location, it is unclear that a federally registered investment adviser does not need to disclose any event that is more than 10 years old.

• Item 11 and the DRPs should be clarified to permit removal of events that are resolved in the adviser's or advisory affiliate's favor after some disclosure has already been made. For example, an adviser would check "yes" in response to question H.(2) to report a pending proceeding. If the proceeding is later resolved in the adviser's favor, the adviser would check "no" in Part 1A; but the only options to check for removal of the disclosure in the Civil DRP are (a) because the affiliate is no longer associated with the firm or (b) because the event occurred more than 10 years ago.

Schedules A and B Direct owners and executive officers/Indirect owners

• Schedules A/B. The Commission should clarify whether advisers will have to list the enumerated relatives of any person with a greater than 5% ownership interest. If so, we do not understand why the SEC desires this information. Further, for simplicity, we suggest that the Commission incorporate these questions into the text of Part 1A, rather than in separate schedules. At a minimum, the two schedules should be combined.

• Schedule A, 2(a). The phrase "and individuals with similar status or functions" may need further clarification to avoid uncertainty by the adviser as to which (other) individuals need to be reported. Perhaps "and individuals with similar status or functions exercising executive responsibility or presumed to have control" may provide more clarification.

• Schedule A, 3. Including the general definition of "indirect owners" under the question, as was done above in the second paragraph of 2(b) for direct owners, would be helpful. This will provide clarification in determining indirect owners and whether Schedule B must be completed.

• Schedule B, 2. The first sentence of this item should clarify that persons who meet the definitions in (a) through (d) are "indirect owners."

Schedule D

• We do not believe that Schedule D is necessary in an electronic environment. All information about one topic should be gathered in one location. Nor do we understand why the creation of multiple Schedules D is necessary. If Schedule D exists at all, the fields should be expanded to accept all information on one schedule. Otherwise large firms will be required to fill out numerous Schedule D pages.⁴²

• 7.B. We suggest that the question about the cost per unit of interests sold in the last year be eliminated. We understand that some limited partnerships are not offered in units, and also do not believe this information is needed here.

Execution pages

• Consistent with the intent of the Coordination Act, we suggest that the last sentence on the page authorize that records be made available to regulators only "as required by law."

• "Adviser CRD Number" should be changed to "Adviser IARD Number" on the execution pages.

APPENDIX B
Specific Comments on Part 2A

Item 1 Cover Page

• The instruction should clearly state that a change in the name and/or title of the contact person does not constitute a material change that triggers the requirement to reprint the brochure. Otherwise a contact person should not be required.

• References to CRD number should be replaced with IARD number.

Item 2 Material Changes

• Because an adviser is not required to provide a summary of material changes to a client or prospective client that has not received a previous version of the brochure, the summary should be a separate document.

• "Material changes" should be defined as changes that would significantly affect a reasonable client's decision to hire an adviser or a client's decision to retain an adviser.

Item 4 Advisory Business

• B. This item needs to better define "specialized" services. See Release at 43.

• D. The Commission should require a firm to use the same date and method for calculating the firm's assets under management as in Item 5.F. in Part 1A. The current proposal creates inconsistency and an opportunity for the adviser to select a particularly "good" month to display.

• F(1). We do not believe providing a list of all wrap fee programs and sponsors is meaningful information for a prospective client. For some advisers, this list could include dozens of items. If applicable, the adviser should state that it provides portfolio management services in wrap fee programs and that a list of sponsors is available upon request. In addition, we question why the adviser must repeat this information as the same information is requested at Item 5.I(2) in Schedule D.

  Item 5 Fees and Compensation

• C. We agree that an adviser should describe generally how it is paid for providing advisory services. However, the Release goes much further, requiring an adviser "to describe the types and amounts (or ranges) of other costs, such as brokerage, custody fees, and fund expenses, that clients may pay in connection with advisory services." While it may be appropriate for the adviser to state that clients will incur additional fees and expenses in connection with the receipt of advisory services, and to describe the types of such fees and expenses, we do not believe it is appropriate for the adviser to conjecture what the amounts or ranges of these other possible fees or expenses might be when they are not charged by the adviser or within its ability to control.

• E. We assume the SEC does not intend this item to require disclosure of compensation paid to employees in connection with obtaining new advisory accounts. This information would be anti-competitive. Further, the adviser should not be required to disclose such information for the same reasons that Rule 206(4)-3 under the Advisers Act does not require a written disclosure statement to be delivered to a prospective client disclosing sales compensation paid to employees.

• E.1. This requirement appears excessive and repetitive. First, if the adviser or a supervised person of the adviser receives compensation for the sale of securities or other investment products, the adviser is told to explain that the practice represents a conflict of interest because the adviser or the supervised person has an incentive to recommend investment products based on the compensation received, rather than on the client's needs. The instruction also requires the adviser to describe its internal procedures or controls for addressing conflicts that arise, including any procedures for disclosing conflicts to clients. The adviser has already disclosed that the practice presents a conflict of interest situation and why it is a conflict of interest. It is unclear what additional disclosure the SEC expects the adviser to provide. In addition, this item may inadvertently imply that an adviser should not recommend its own investment products (i.e., mutual funds or partnerships).

• Performance Fees. The Commission requests comment on whether to require performance fee disclosure.⁴³ We do not recommend such disclosure. Advisers already are required to provide disclosures in contracts with clients who will be charged performance fees. Such specific disclosures will be more meaningful than any general disclosure.

Item 7 Methods of Analysis, Investment Strategies and Risk of Loss

• B. The SEC should define what it means by "frequent trading of securities," as this term could be defined to mean day-trading, short-term trading (within 90 days), turnover of more than 100% per year, etc. The term "frequent" is also relative to the type of client and security traded. It seems obvious that a client will incur additional transaction costs (e.g., brokerage commissions) with each additional trade.

• D. Practices regarding cash balances in client accounts vary so much depending on types of accounts and directions from clients that it is difficult to imagine that meaningful disclosure could be provided in response to this item.

Item 8 Disciplinary Information

• We do not recommend requiring that disciplinary information be provided in a separate written document accompanying the brochure. The disclosure and delivery requirements of new Form ADV are complicated enough with the stickers, supplements and DRPs, etc. without requiring yet another document.

• We agree that it would be in the adviser's best interests to prepare and maintain a memorandum memorializing the adviser's determination not to disclose an event described in this item.

• We strongly disagree with the proposal requiring an adviser to provide clients with a copy of an SEC administrative order unless the order itself required such distribution. As the Release indicates, the SEC has in some cases required an adviser to send copies of such orders to existing clients and for one year to prospective clients as a condition of settlement in administrative proceedings.⁴⁴ Such a requirement may very well be appropriate in the context of settling an administrative proceeding based upon the individual facts presented by the proceeding. A blanket requirement, however, is not appropriate and should not be included in Form ADV. In any event, disclosure of such an infraction may be deemed a "material" event requiring amendment or stickering of the brochure.

• While some disputes between advisory firms and their clients may be resolved through arbitration, such an action is not comparable to a felony or criminal conviction. As such, we do not believe it would meet the definition of a "disciplinary event material to evaluating the adviser's business or the integrity of its management." Thus, we do not recommend including arbitration actions in the brochure.⁴⁵ Parties are often assessed some liability for purposes of ending the dispute and coming to a resolution of the matter without any finding that the assessed party committed any wrongdoing. Also, because some arbitrators do not issue reports of their findings, it is difficult or impossible to distinguish arbitrations involving matters that reflect upon the integrity of the adviser.

• If the Commission does require arbitration disclosure, we recommend that disclosure be required only where the arbitrator finds a violation of an investment-related statute. Arbitration of commercial disputes, for example, is not relevant in this context. Further, a $2,500 threshold for such claims is substantially too low; if disclosure is required, the threshold should be a $50,000 award for SEC-registered firms.

Item 9 Other Financial Industry Activities and Affiliations

• C. We agree that advisers should describe the nature of any conflicts involving relationships between the adviser or any management persons and any related persons. However, we do not agree advisers should be required to include detailed descriptions of all their internal procedures in their brochure. It is the adviser's responsibility to control and manage these conflicts.

Item 10 Participation or Interest in Client Transactions and Personal Trading

• We agree that advisers should describe the conflicts that arise when the advisory firm or a "related person" has a financial interest in, or trades in, securities they recommend to clients. However, we do not agree that the adviser should describe, other than in general terms, the controls or procedures it uses to control or manage those conflicts. To describe these procedures in detail would render the brochure unreadable. Indeed, the Release recognizes that many advisers have "extensive procedures" in place to monitor and control employees' personal securities trades and financial interests.⁴⁶ The SEC should clarify the amount of disclosure it expects with respect to the procedures it requests in each of these items. We also do not understand the stated requirement to disclose "procedures for disclosing conflicts to clients" - the brochure is the disclosure.

Item 11 Brokerage Practices

• A.4. We do not agree that advisers need to explain how commission recapture works.⁴⁷ Clients who instruct the adviser to direct their brokerage understand that they are going to receive benefits from the broker-dealer acting as custodian for their assets. Commission recapture does not present any conflicts of interest - the adviser does not receive any benefit in return for directing the brokerage for that client. All benefits inure directly to the client. We agree, however, that advisers should state whether they permit clients to request directed brokerage arrangements.

• Some of the disclosure required, in effect, may penalize small firms that may not be able to "negotiate" as much as larger firms with larger order flows.

• The Release should clarify its discussion of soft dollars to include execution services in addition to research, pursuant to Section 28(e).

Item 14 Custody

• We agree that disclosure regarding actual custody should be included in the brochure. However, the Commission's position regarding "constructive" custody has been a longstanding source of confusion in the investment advisory community. We are disappointed that the Commission did not take this opportunity to clarify the circumstances under which an adviser is deemed to have custody. This item is particularly unclear because it implies that "special reports" are required if the adviser is deemed to have custody only because advisory fees are deducted directly from the account.

Item 16 Proxy Voting Policies

• We do not believe the adviser's brochure is the appropriate venue for discussing actual proxy-voting policies, practices and procedures. Such policies and procedures typically are very detailed (e.g., matter-specific) and thus very lengthy. We believe, however, that advisers should state that their proxy voting policies and procedures are available upon request, as well as how the adviser voted during the year on behalf of the client.

• We agree advisers should disclose whether they have, or will accept, authority to vote proxies for clients and whether clients may instruct the adviser how to vote in a particular proxy solicitation. If an adviser does not vote proxies with respect to client securities, the brochure should so state. We also agree that an adviser should disclose how it would vote when there is a conflict between the adviser and the client regarding how to vote a particular item.

Item 17 Investment Performance

• We do not believe it serves any useful purpose for the adviser to disclose the standards it uses to calculate (or present) its investment performance in the brochure since the adviser already must disclose this information each time it advertises or reports the investment performance of managed accounts. In addition, this disclosure would be made in a vacuum because no performance information is presented in the brochure. This disclosure also may have the effect of endorsing or mandating use of the AIMR-PPS standards, with respect to which the SEC has officially taken no position.

• Similarly, the request about verification may have the effect of mandating costly verifications. If the SEC desires that effect, it should propose such a rule. Further, we do not believe it is relevant to clients "who" performed the third-party review of the adviser's performance information. We also do not believe clients are interested in the details of the review process.

Item 18

• This item should clarify that the balance sheet is not required under various no-action letters for certain circumstances involving constructive custody.

• We agree that an advisory firm's bankruptcy in the past ten years may be material to clients. The Commission requests comment on whether additional bankruptcy disclosure is necessary.⁴⁸ We do not believe disclosure would be material to clients regarding predecessor firms, management persons, or firms under common control with the adviser. If, however, the adviser is a sole proprietorship, bankruptcy information about the owner may be relevant.

Item 19

• Requiring both an index and a table of contents seems unnecessary and will clutter the document.

APPENDIX C
Specific Comments on Part 2B

Instructions to Part 2B

• The Commission should clarify the instructions to Part 2B with respect to which employees an adviser is required to prepare and deliver brochure supplements. The release states that the supplement "is designed to require information about persons who have substantial responsibility for the investment advice clients receive."⁴⁹ In contrast, the first bullet of instruction 1 to Part 2B states, "You must prepare a supplement for each supervised person who on a regular basis communicates investment advice to a client."⁵⁰ Particularly in large firms, some persons who regularly communicate investment advice to a client do not have substantial responsibility for the advice the client receives. If the Commission does not accept our alternative approaches set forth at pp. 14-16, it should at a minimum not require supplements for persons who merely communicate or relay advice.

Item 1 Cover Page

• The brochure supplement would require cover page language directing clients to the IARD for additional information regarding the subject of the supplement. This statement incorrectly appears to assume that all persons for whom brochure supplements would be prepared are investment adviser representatives that have filed Forms U-4 with a state through the IARD. Many employees of large firms are not investment adviser representatives because, for example, they have an institutional clientele. The Commission should not require firms to imply incorrectly that a separate document is or should be available on the IARD for employees. We would not oppose a required reference to the IARD for information about the firm.

Item 3 Disciplinary Information

• This item requires brochure supplements to contain disclosures of proceedings revoking or suspending a professional attainment, designation, or license. Because proceedings is a defined term that is limited to formal administrative or civil actions initiated by a governmental agency, SRO, or foreign financial authority, this item would not capture revocations or suspensions by the entities that grant designations, e.g., the Investment Counsel Association of America (CIC), the Association for Investment Management and Research (CFA), etc. Further, this item may require unintended disclosures, such as the revocation of a driver's license.

• If, however, the Commission intends to require disclosure regarding actions of a non-government designating authority, we oppose this provision. Without auditing all of the designating authorities, the Commission cannot be certain that procedural, or due process-like, safeguards are in place to guard against abuses. We do not think it is wise to have peer-review actions as a required disclosure in Form ADV. Further, if the activity that leads to the suspension or revocation of a designation is egregious, a government entity typically will have taken action against the person, triggering reporting through a different subpart to Item 3.

Item 4 Other Business Activities

• B. We oppose the required disclosure of "any business or occupation for compensation." This item would require disclosure of any other business activities, even though they are not material to clients. For example, if a supervised person referees high school basketball games in the evenings, he or she would be required to disclose this occupation. This item should be rephrased such that disclosure of other business activities - not already required to be disclosed pursuant to 4.A - is only required if the other activity is investment-related or provides the primary source of the supervised person's income.

Item 6 Investment Advice and Supervision

• Item 6 requires disclosure of the title and telephone number of the person responsible for supervising the employee's advisory activities. Keeping this disclosure up to date will result in frequent stickering or updating of the brochure supplement. Further, a firm contact person and phone number may be required on the front cover of the brochure, making this an unnecessary requirement. We request that the Commission eliminate this item.

Item 7 Financial Information

• Item 7 requires disclosure if the employee has been the subject of a bankruptcy petition during the past ten years. The Commission is also requiring disclosure of firm bankruptcies in the brochure. Other than for sole proprietors, a personal bankruptcy will have no effect on an investment adviser's ability to meet client commitments, and thus should not have to be disclosed in the brochure supplements. Disclosure of such items may also defeat the bankruptcy laws' purpose of permitting individuals a "clean" start.

Footnotes

¹ The ICAA is a not-for-profit association that exclusively represents the interests of SEC-registered investment advisers. Founded in 1937, the Association's membership today consists of more than 250 investment advisory firms that collectively manage in excess of $2 trillion for a wide variety of institutional and individual clients. For additional information, please consult our web site at http://www.icaa.org.

² Electronic Filing by Investment Advisers; Proposed Amendments to Form ADV, Release Nos. IA-1862, 34-42620, April 5, 2000 ("Release").

³ This anticipated benefit of the system would be achieved only if all states accept notice filings electronically.

⁴ E.g., Release at 22.

⁵ Release at 23.

⁶ The Commission does not intend to require advisers to file brochure supplements. Release at 68.

⁷ The Investment Adviser Supervision Coordination Act (Coordination Act) preempts states from regulating investment advisers registered with the SEC. Section 307(a) of the Act, however, provides: "Nothing in this title or any amendment made by this title prohibits the securities commission . . . of any state from requiring the filing of any documents filed with the Commission pursuant to the securities laws solely for notice purposes ...." (emphasis added).

⁸ Release at 23 n.68.

⁹ The concept of notice filing is that SEC-registered firms should provide relevant states with copies of documents as notice of what they have filed with the SEC. Most states have been requiring investment advisers to file a copy of their registration document, Form ADV, and any amendments as notice. Some states require only page 1 of Form ADV as notice, along with a fee.

¹⁰ Release at 10-11.

¹¹ Release at 12 n.26.

¹² Opening Statement of Chairman Arthur Levitt, U.S. Securities and Exchange Commission, Amendments to Form ADV (April 5, 2000).

¹³ E.g., Letter from ICAA Executive Director David G. Tittsworth to Jonathan G. Katz, Secretary, Securities and Exchange Commission (Jan. 12, 2000); ICAA Report on Pay-to-Play and Investment Advisory Profession (May 15, 2000); Statement of David G. Tittsworth, Executive Director, ICAA, Roundtable on Investment Adviser Regulatory Issues, SEC (May 23, 2000).

¹⁴ E.g. Proposed ADV Part 1A, Item 5.B.2 and Item 11.E.2.

¹⁵ Interestingly, information disclosed by investment advisers about their firms and their employees is much more extensive and accessible to the public than the information clients receive from broker-dealers and their agents. Broker-dealers are not required to disclose fully all conflicts of interest, business practices, and policies and procedures on Form BD and are not required to provide Form BD to clients.

¹⁶ See Release at 14.

¹⁷ Release at 48.

¹⁸ Release at 51.

¹⁹ Release at 9 n.14; General Instructions, Item 8 at pp. 4-5.

²⁰ The definition of "notice filing" in the glossary and the description in Item 2B of Part 1A provide a more accurate statement of law and practice.

^{21 21} Similarly, in item 8(a) to the Instructions for Part 2A, the Commission asserts that "State laws require you to file paper copies of all brochure amendments with the state securities authorities to which you make notice filings." This statement is inaccurate. Some state laws, for example, currently require notice filers to file only page 1 of Form ADV annually.

²² Release at 19-20.

²³ E.g., Michigan Public Employees Retirement System Act, section 13(8)(a); Senate Bill 902, Oklahoma 2^nd Session of the 47^th Legislative Session (version date May 25, 2000) (to require advisers providing advice to school districts to be registered with the state).

²⁴ We understand that some firms already deliver the brochure annually to all clients for better client relations and ease of recordkeeping.

²⁵ E.g., Release at 39, 129-130.

²⁶ Clients' traditional lack of response to firms' annual offers may be evidence that clients do not feel this type of information is helpful.

²⁷ Indeed, the Commission created the concept of a "profile" prospectus for this very reason, and is in the process of deciding whether to eliminate the requirement that funds regularly deliver an updated prospectus to existing shareholders. E.g. Success and Survival of the Mutual Fund Industry in a Changing World, Remarks by Paul Roye, Director, SEC Division of Investment Management (May 19, 2000).

²⁸ The Commission has frequently accomplished "rulemaking" by inspection or enforcement actions. We oppose this method of regulation. For example, a few years ago, advisers did not describe their allocation or "bunching" policies in their Form ADV. We understand that the inspection staff at that time essentially "forced" advisers to start doing so through a wave of deficiency letters. This is not an appropriate means of informing the profession of new requirements.

²⁹ The only policy explicitly and affirmatively required of advisers by current law is an insider trading policy. Policies and procedures can constitute a safe harbor to a failure to supervise charge pursuant to Section 203(e)(5) of the Advisers Act. Many policies and procedures have implicitly been required or encouraged by no-action letters, interpretive releases, speeches by Commission staff, examinations, and enforcement actions. For example, while we support the Commission's proposed change to Rule 204-3 in the release at n.116, we note the apparently new announcement that a client can terminate the advisory relationship "at any time." Many advisers, however, have client contracts that currently provide for termination by either party upon 10 days or as many as 60 days written notice.

³⁰ See Letter of David G. Tittsworth, ICAA Executive Director, to Arthur Levitt, Chairman, Securities and Exchange Commission (May 16, 2000).

³¹ Variable Annuities: What You Should Know (SEC web version dated June 5, 2000). See also Mutual Fund Investing: Look at More Than a Fund's Past Performance (SEC web version dated Jan. 24, 2000).

³² The Commission implicitly recognizes this fact, by stating in the instructions to Part 2A exactly what the disclosure should include for certain topics.

³³ Before the Coordination Act, advisers were required to provide information on Schedule D not only for management, investment committee members, and persons with disciplinary history, but also for persons "giving investment advice" on behalf of the adviser in particular states (item G). The latter requirement for Schedule D existed only for states' purposes. After the Coordination Act, advisers were no longer required to provide Schedule D information for persons only "giving advice" who did not fit any other category of required Schedule D filers.

³⁴ If this approach is taken, the requirement to disclose general educational standards should be re-inserted into the brochure. That disclosure is currently required in Item 5 of Part II.

³⁵ For example, we understand that some sophisticated clients are requesting and receiving information about trading personnel of an investment adviser.

³⁶ "The most important information in the supplements - the supervised person's disciplinary history - would be reported in the DRP Schedules in Part 1 of Form ADV and available through the IARD." Release at p. 68.

³⁷ If the Commission chooses to make available an educational brochure for investors, as discussed above, it could emphasize the ability of clients to require and obtain information about any employee of the investment adviser involved in the advisory process.

³⁸ This system would work well for the vast majority of investment advisers that employ few, if any, persons with material disciplinary history. Perhaps firms that have a large number of disciplinary disclosures could have the alternative of using the Commission's proposed brochure supplement system so as not to render the brochure too lengthy.

³⁹ Rules Implementing Amendments to the Investment Advisers Act of 1940, Rel. No. IA-1633 (May 15, 1997).

⁴⁰ Exemption to Allow Investment Advisers to Charge Fees Based Upon a Share of Capital Gains Upon or Capital Appreciation of a Client's Account, Rel. No. IA-1731 (July 15, 1998).

⁴¹ Of course, certain private information about the individual filing the U-4 would have to be blocked or deleted, such as any residential addresses or phone numbers, social security numbers, birth dates, and similar personal information.

⁴² The same issue occurs with proposed Schedule W1 of Form ADV-W

⁴³ Release at 45.

⁴⁴ Release at 50 and n.156.

⁴⁵ See Release at 51 (requesting comment on arbitration disclosure).

⁴⁶ Release at n.160.

⁴⁷ See Release at 60 (requesting comment on the commission disclosure requirement).

⁴⁸ Release at 64.

⁴⁹ Release at 69.

⁵⁰ Part 2B of Form ADV: Instructions for Preparing a Brochure Supplement.