|"New Form ADV Rule Conflicts with Old No-Action Letter for Fee Disclosures for Qualified Purchasers"
May 31, 2011
What are you to do when two rules collide? It happens. Case in point is the SEC's new Form ADV rule and a 1988 no-action letter.
The new Form ADV rule provides a pass on disclosing your fees to qualified purchasers (defined as a person who owns at least $5 million in investments). That old no-action letter prompted by the Investment Company Institute (“ICI”) received relief for sharing performance results on a gross basis in a one-on-one presentation with a prospective client. However, it came with four conditions, including "disclosure that the investment advisory fees are described in Part II of the adviser's Form ADV."
Of course, the Roman numerals are gone and that document is now known as Form ADV, Part 2.
"These issues come up all the time," says Lawrence Stadulis, a partner with Stradley Ronon in Washington. It's not uncommon for a revised rule or form to conflict with an earlier no-action or interpretation letter, he continues. You could ask the SEC for a clarification but he believes the newer rule would "trump a 1988 staff interpretation." You also can assume a qualified purchaser is sophisticated enough to know she can negotiate fees and to know what gross returns mean, he adds.