SEC Releases New Form ADV Guidelines


New York – The U.S. Securities and Exchange Commission has posted its proposed amendments to Form ADV, including its guidelines for the disclosure of “soft dollars”. The proposed guidelines go beyond the previous requirements, requiring more discussion about how advisors use soft dollars, how they manage the conflicts, and the benefits received.

According to Robert Plaze, associate director in the SEC’s Division of Investment Management, who had a hand in crafting the amendments: “So the new form, in response to what [OCIE] found, goes beyond simply saying that you engage in soft dollars and simply saying [the transactions] involve conflicts. The new form specifies some of the conflicts we want advisors to address that are essentially inherent in soft dollars.”

In its proposed rule, the SEC says its agenda is not to “create a negative impression regarding soft dollars (sic) arrangements, but rather to require full disclosure of arrangements that we believe involve significant conflicts of interest.” Despite the disclaimer, it is clear that soft dollars remain an area of distaste for the SEC. One of the goals of the new guidelines is to make it clear that soft dollars imply higher fees to clients: “That is something Section 28e of The Exchange Act specifically protects,” said Plaze. “Clients need to understand that and circumscribe their advisors if they wish to.”

Although Plaze indicated one of the objectives was “full disclosure of arrangements”, the proposal falls short of this. The SEC has backed off from requiring disclosure of the amounts of commissions paid for research, as the Financial Services Authority (FSA) in the UK, the Autorité des Marchés Financiers (AMF) in France, and the Canadian Securities Administrators (CSA) in Canada, among others, have done.

The one clear benefit of the proposed rule will be to prod mutual funds to disclose soft dollar arrangements for Wall Street research. Only 60% of funds disclose in their Form ADV’s that they use soft dollars, which is far lower than the percentage of funds that pay for Wall Street research through bundled commissions.

The relevant portion of the new guidelines are excerpted below. For the full release go to

Item 12. Brokerage Practices. Proposed Item 12 would require advisers to describe how they select brokers for client transactions and determine the reasonableness of brokers’ compensation. The item also would require advisers to disclose how they address conflicts arising from their receipt of “soft dollars,” i.e., the receipt of benefits such as research in connection with client brokerage.

This item, which we discuss in more detail below, is largely the same as originally proposed, but with two changes urged by commenters. First, we have omitted a proposed requirement that advisers disclose in their brochures whether they negotiate commissions. Second, we have omitted the proposed requirement that advisers disclose whether they participate in commission recapture programs. We understand that these programs are not typically sponsored or promoted by advisers, but are more likely driven by client demands. We request comment on our understanding of these practices. Should we require brochure disclosure in either instance?

Soft Dollar Practices. Many advisers receive brokerage and research services in
reliance on section 28(e) of the Exchange Act, as well as other “soft dollar” products and services, provided by particular brokers in connection with client transactions. [Nearly 60 percent of advisers registered with the Commission report on Form ADV, Part 1A, Item 8.E that they or a related person receive soft dollar benefits in connection with client transactions. (IARD Data as of Sept. 30, 2007).] As we have previously noted, use of client securities transactions to obtain research and other benefits creates incentives that can result in conflicts of interest between advisers and their clients. Because of these conflicts, we have long required advisers to disclose their policies and practices with respect to their receipt of soft dollar benefits in connection with client securities transactions. Some commenters questioned the conflicts we identified and complained that the item would tend to cast aspersions on the use of soft dollar arrangements that are commonplace, such as those that fit within the safe harbor established by section 28(e). Our intent is not to create a negative impression regarding soft dollars arrangements, but rather to require full disclosure of arrangements that we believe involve significant conflicts of interest.

Our 2000 proposal responded to a 1998 report from our Office of Compliance Inspections and Examinations that concluded that advisers’ disclosure often failed to provide sufficient information for clients or prospective clients to understand the advisers’ soft dollar practices and the conflicts those practices present. In its report, OCIE noted that most advisers’ descriptions were simply boilerplate, and urged that we consider amending Form ADV to require better disclosure. We request comment on whether our proposed item would achieve this goal.

Item 12 would require an adviser that receives soft dollar benefits in connection with client securities transactions to disclose its practices. The proposed item would require a brochure’s description of soft dollar practices to be specific enough for clients and prospective clients to understand the types of products or services the adviser is acquiring and permit them to evaluate conflicts. Disclosure must be more detailed for products or services that do not qualify for the safe harbor in section 28(e) of the Exchange Act, such as research that does not aid in the adviser’s investment decision-making process. Will the proposed disclosure be sufficient to adequately inform clients?

Item 12 also would require an adviser to describe the types of conflicts it has when it accepts soft dollar benefits and to disclose how it addresses those conflicts. The item would require the adviser to explain whether it uses soft dollars to benefit all client accounts or only those accounts whose brokerage “pays” for the benefits, and whether the adviser seeks to allocate the benefits to client accounts proportionately to the soft dollar credits those accounts generate. The item also would require the adviser to explain whether it “pays up” for soft dollar benefits. As we noted above, some commenters to our 2000 proposal questioned our description of the conflicts of interest identified in the item. We ask commenters to consider these descriptions.


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