On July 28, 2010, the Securities and Exchange Commission (the “SEC”) adopted amendments (the “Amendments”) to Part II of Form ADV (now known as “Part 2”) and to related rules under the Investment Advisers Act of 1940, as amended (the “Advisers Act”), including the recordkeeping rule (Rule 204-2). This memorandum provides an overview of the Amendments, which will become effective 60 days after publication in the Federal Register. As part of the Amendments, registered advisers are required to develop a new firm brochure in Part 2A (the “Firm Brochure”) as well as new advisory personnel disclosure supplements in Part 2B (each, a “Brochure Supplement”).

Advisers that apply for registration with the SEC after January 1, 2011 must file a Firm Brochure that meets the new requirements as part of their application for registration as an investment adviser. Advisers that are currently registered with the SEC and whose fiscal year ends on or after December 31, 2010 must file an updated Firm Brochure that satisfies the new requirements in their next annual updating amendment. (For example, an adviser with a fiscal year end of December 31, 2010 will be required to file an updated Firm Brochure no later than March 31, 2011).

The Firm Brochure

The Amendments replace the existing check-the-box, fill-in-the-blank format of Part II with a new plain English, narrative format in which an adviser must describe those practices in which it currently engages or is reasonably likely to engage. The SEC believes that the narrative format will allow clients and prospective clients to better understand an adviser’s business and related conflicts. Advisers must draft the Firm Brochure in a specified format, responding to each of the 18 separate items in a predetermined order and using specified headings. Advisers that provide substantially different advisory services to different clients may prepare separate Firm Brochures as long as each client receives all information about the services and fees applicable to that client. Although many of the disclosure requirements remain the same, advisers must now specifically disclose conflicts of interests related to particular items as well as explain how they address those conflicts of interest.¹Several significant disclosure items are highlighted below:

• Material Changes. An adviser must create an annual summary of the material changes to the Firm Brochure since the last annual update. The summary may appear on the cover page of the Firm Brochure or on the page following the cover page. Alternatively, the adviser may prepare a separate document summarizing the material changes to the Firm Brochure and file the document as an exhibit to the Firm Brochure.
• Performance-Based Fees and Side-By-Side Management. An adviser must disclose whether it charges performance fees or has supervised persons that manage accounts that pay performance fees. If an adviser also manages accounts that are not charged a performance fee, it must describe the conflicts of interests arising from the side-by-side management of performance-based fee accounts and the other accounts, and how the adviser addresses those conflicts.
• Methods of Analysis, Investment Strategies and Risk of Loss. An adviser must describe its methods of analysis and investment strategies, and describe any material risks related to “significant” methods of analysis, strategies and certain types of securities it recommends. The adviser must provide additional details if the risks related to the foregoing items are significant or unusual. An adviser engaged in frequent trading practices must disclose how such practices may impact performance.
• Adviser Disciplinary Information. An adviser must disclose any legal or disciplinary event that is material to evaluating the integrity of the adviser or its management personnel. Certain disciplinary events are presumed to be material. Firm Brochure disclosure of disciplinary information is required in addition to the disciplinary information that is currently required in Part 1 of Form ADV. In conjunction with adopting the Amendments, the SEC rescinded Rule 206(4) 4 of the Advisers Act, which requires disclosure of certain financial and disciplinary information, because the requirements of the Firm Brochure rendered the Rule’s requirements largely duplicative.

The remaining separate items in the Firm Brochure are as follows: the Cover Page; the Table of Contents; the Advisory Business; Fees and Compensation; Types of Clients; Other Financial Industry Activities and Affiliations; Code of Ethics, Participation or Interest in Client Transactions and Personal Trading; Brokerage Practices; Review of Accounts; Client Referrals and Other Compensation; Custody; Investment Discretion; Voting Client Securities; and Financial Information. In addition, advisers that sponsor wrap fee programs must continue to provide a separate wrap fee brochure, which meets the requirement set forth in Appendix 1 of Part 2A (which replaces Schedule H).

Brochure Supplements

An adviser must create one or more Brochure Supplements that include information about each supervised person (e.g., a partner, officer, director or employee of the adviser) who: (i) formulates investment advice for a client and has direct client contact or (ii) makes discretionary investment decisions for client assets. Each Brochure Supplement must be written using plain English, be organized in the order specified by Part 2B, utilize the same headings and provide the following information about the supervised person:

• formal educational background and business experience;
• disciplinary history that is material to a client’s evaluation of a supervised person’s integrity;
• other business activities;
• additional compensation paid to the supervised person by a non-client for providing advisory services; and
• how the adviser monitors the advice provided by the supervised person and the name and other information about the supervisor of that supervised person.

Initial and Annual SEC Filings

The Firm Brochure

Among other requirements, in order to register with the SEC, an adviser must initially file the Firm Brochure electronically with the SEC through the IARD system. On an annual basis no later than 90 days after the end of its fiscal year, an adviser must update its Firm Brochure and create a summary of material changes (either as part of the Firm Brochure or as an exhibit thereto) and file them with the SEC. An adviser does not have to prepare the Firm Brochure if it does not have any clients that must receive it.² An adviser does not have to submit an annual filing of the Firm Brochure with the SEC if it has not filed an interim amendment since its last annual amendment and the Firm Brochure remains materially accurate.

Brochure Supplement

The Brochure Supplements are not required to be filed with the SEC. Instead, an adviser must simply retain the Brochure Supplements with its records. If an adviser does not have any client to whom a Brochure Supplement would have to be delivered, it does not have to prepare a Brochure Supplement.³

Initial and Annual Delivery

The Firm Brochure

An adviser must deliver⁴ the Firm Brochure to a client⁵ before or at the time it enters into an advisory contract with the client.⁶ On an annual basis no later than 120 days after the end of its fiscal year, an adviser must deliver to clients either (i) an updated Firm Brochure, including or accompanied by the summary of material changes, or (ii) the summary of material changes to the Firm Brochure, accompanied by (i) an offer to provide a current copy of the Firm Brochure without charge, and (ii)(A) the website address (if available), (B) an e-mail address (if available), (C) a telephone number by which a client may obtain the current brochure from the adviser, and (D) the website address for obtaining information about the adviser through the Investment Adviser Public Disclosure (IAPD) system.

Brochure Supplement

An adviser must deliver the applicable Brochure Supplements to the applicable client at or before the time advisory services are provided to the client, but an adviser has no annual delivery obligation to its clients with respect to the Brochure Supplement.

Amendments

The Firm Brochure

An adviser must amend the Firm Brochure by filing it promptly with the SEC following any material change to information in the Firm Brochure, but it is only required to deliver to clients an interim amendment if the amendment relates to the addition of a disciplinary event or a material change to disciplinary history information, in which case the adviser must deliver the interim amendment promptly. The interim amendment can also be in the form of a statement describing the material facts relating to the change in disciplinary information. If an adviser has not filed an interim amendment since its last annual amendment and the Firm Brochure remains materially accurate, the adviser does not have to deliver an updated Firm Brochure or a summary of material changes to its clients.

Brochure Supplement

An adviser must promptly update a Brochure Supplement when information contained in the Brochure Supplement becomes materially inaccurate but is only required to deliver the updated Brochure Supplement to its clients when amending information relating to disciplinary information. The update can also be in the form of a statement describing the material facts relating to the change in disciplinary information.

Transition Period

An adviser that applies for registration with the SEC after January 1, 2011 must, upon registration, begin to deliver to each existing and prospective client the new Firm Brochure and one or more Brochure Supplements that meet the requirements of the amended forms in Part 2 of Form ADV.

An adviser that is currently registered with the SEC and whose fiscal year ends on or after December 31, 2010 must, within 60 days of filing its first electronic annual updating amendment that includes the Firm Brochure, initially deliver to each existing client the new Firm Brochure and one or more Brochure Supplements that meet the requirements of the amended forms in Part 2. In addition, as of the date on which a currently-registered SEC adviser makes its first annual updating amendment that includes the Firm Brochure, the adviser must begin to use its new Firm Brochure and Brochure Supplements to comply with the requirements pertaining to initial delivery to new and prospective clients. (For example, an adviser with a fiscal year end of December 31, 2010 will be required to deliver the new Firm Brochure and any applicable Brochure Supplements to existing clients by May 30, 2011, and beginning March 31, 2011, to deliver the new Firm Brochure and any applicable Brochure Supplements to new and prospective clients).

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If you have any questions with respect to the foregoing, please contact your primary attorney in the Investment Management Group at Seward & Kissel LLP.

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¹ The General Instructions for the Part 2 recognize that, as a fiduciary, an adviser musk seek to avoid conflicts of interest with its clients, and, at minimum, make full disclosure of all material conflicts of interest between the adviser and its clients that could affect the advisory relationship. This requires that the adviser provide the client with sufficiently specific facts so that the client is able to understand the conflicts of interest that the adviser has and the business practices in which the adviser is engaged, and can give informed consent to such conflicts or practices or reject them. To the extent that the items in Part 2 do not comprehensively address all of the conflicts or material disclosure that an adviser must provide to its clients, the adviser may have to disclose to clients information not specifically required by Part 2 of Form ADV or in more detail than the Firm Brochure and Brochure Supplement items might otherwise require.

² An adviser does not have to deliver Firm Brochures to: clients that only receive impersonal investment advice and who will pay the adviser less than $500 per year, clients that are registered investment companies or clients that are business development companies.

³ An adviser is not required to deliver Brochure Supplements to: clients to whom the adviser is not required to deliver a Firm Brochure (or wrap fee program brochure); clients who receive impersonal investment advice, even if they receive a Firm Brochure; and certain clients who are “qualified clients” on the basis of their status as executive officers, directors, trustees, general partners or persons serving in similar functions or other firm employees participating in the firm’s investment activities for the past twelve months.

⁴ Delivery of the Firm Brochure (including the summary of material changes) and the Brochure Supplement may be in electronic format provided the adviser has obtained the client’s consent to electronic delivery in a manner that is consistent with the SEC’s published interpretive guidance on electronic delivery.

⁵ We recommend that private fund advisers deliver the Firm Brochure (and Brochure Supplements) to the underlying investors of the fund even though the private fund is considered to be the client.

⁶ Currently, an adviser may provide the brochure 48 hours before entering into the advisory agreement or at the time of entering into the agreement, if the client has the right to terminate the agreement without penalty within five business days thereafter.