SEC Adopts Amendments to Part 2 of Form ADV

By Final Rule dated July 28 and to be effective 60 days after publication in the Federal Register, registered investment advisers will be required to provide new and prospective clients with a brochure and brochure supplements written in plain English.  Advisers must file their brochures electronically, and the SEC will make them available to the public through the Investment Adviser Public Disclosure website.

Since 1979, the SEC has required IAs to deliver a written disclosure statement to clients pursuant to rule 204-3 under The Investment Advisers Act of 1940.  Part 2 of Form ADV sets out minimum requirements for this disclosure statement, which is commonly referred to as the "brochure."  In the past, Part 2 has required IAs to respond to a series of multiple-choice and fill-in-the-blank questions organized in a “check-the-box” format, supplemented in some cases with brief narrative responses. IAs have had the option of providing information required by Part 2 in an entirely narrative format, but few have done so. 

The revised Part 2 requirements include two sub-parts, Part 2A and Part 2B.  Part 2A contains 18 disclosure items about the advisory firm that must be included in the brochure, including disclosure of the adviser’s business, fees and compensation, conflicts of interest, disciplinary history, brokerage practices and other information that help clients make an informed decision about whether to hire or retain that adviser.  The Part 2B "brochure supplement" includes information about certain advisory personnel on whom clients rely for investment advice.

Reorganized Auto Parts Manufacturer Registers Securities for Reoffer

Michigan-based Cooper-Standard Holdings Inc. emerged from Chapter 11 bankruptcy on May 27 through a series of transactions contemplated by the Plan of Reorganization, including a private placement to certain creditors.  The Form S-1 filed by Cooper-Standard on July 26 (file no. 333-168316) was filed in connection with a registration rights agreement that was filed as an exhibit to the Form 8-K filed on June 3. 

Under the reorganization, prepetition noteholders were permitted to participate in a common stock rights offering conducted during the solicitation of votes to accept or reject the Plan.  Additional common shares as well as 7% cumulative participating convertible preferred shares were issued to certain creditors pursuant to a commitment agreement that provided for the backstop of the rights offering.

The Chapter 11 Plan of reorganization was filed as an exhibit to the Form 8-K filed by Cooper-Standard on May 24, and the Commitment Agreement with the backstop creditors was filed as Exhibit 10.49 to the Form 10-K for FY09 filed on 3/31/10 (file no. 333-123708).

Commodity Pools Designed as Short-Term Trading Vehicles Emerge

Direxion Shares ETF Trust II intends to offer a series of exchange traded funds that seek daily leveraged investment results that correlate positively (or negatively) to 300% the daily return (or inverse return) of a target benchmark, generally a commodity-based or currency-based instrument.  The Delaware statutory trust is organized into separate series that are subject to regulations as commodity pools under the Commodity Exchange Act, and their sponsor is subject to regulation as a commodity pool operator.  None of the ETFs are a mutual fund or any other type of investment company under the Investment Company Act of 1940. 

Direxion II filed its Form S-1 on July 20 (file no. 333-168227), registering common units of beneficial interest that will be separately offered for each fund.  ETFS Collateralized Commodities Trust filed a Form S-1 on May 27 (333-167167) in connection with 18 initial ETFs that are intended to be used as short-term trading vehicles.  The ETFS funds seek daily investment results which correspond to 100% or 200% of the daily performance of the specified commodity index. 

The emergence of ETFs organized as a trust of commodity pools is a fairly recent experience.  More commonly, an ETF trust has tended to be an open-end management investment company registered under the 1940 Act.  Direxion Shares ETF Trust, a non-diversified series of mutual funds that seek to provide daily investment results much like Direxion II, filed a Registration Statement on Form N-1A on 9/16/08, file no. 811-22201.

J.P. Morgan Chase Subsidiary Resumes CMO Offering Activity

J.P. Morgan Chase Commercial Mortgage Securities Corp., a steady issuer of pass-through certificates through 2007, has filed a shelf Registration Statement on Form S-3 to offer a new series of collateralized mortgage obligations.  When SEC file no. 333-165147 is declared effective, the subsequent prospectus supplement will be the first one filed by the subsidiary since a $993.9 million offering dated 4/30/08. 

JPMCCMSC has registered CMO certificates for a proposed maximum aggregate offering of $58.3 billion.  Pursuant to 1933 Act Rule 415(a)(6), $39.6 billion of unsold securities from its prior Registration (333-140804) are included in the new Registration. 

The new Registration also relates to the Form S-3 filed by Bear Stearns Commercial Mortgage Securities Inc. (file no. 333-146993).  The former Bear Stearns Companies' subsidiary was merged into the J.P. Morgan subsidiary on 12/22/09.  Pursuant to 1933 Act Rule 429, the $18.6 billion of registered and unsold mortgage pass-through certificates under the BSCMI Registration will be offered under the same prospectus.

Former IPO Candidates Return with New Registrations

After a robust IPO market in 2007 (the most since 2000), initial public offerings fell off the cliff in 2008 and only in 2010 have resumed sustained activity.  A total of 113 IPO Registration Statements were withdrawn in 2008 as were another 58 in 2009, with most would-be issuers citing adverse market conditions as the reason for not proceeding with the offering. 

With 70 completed deals in the first half of 2010, the IPO market is clearly in recovery mode.  Among recent IPO registrants, several are making a second attempt after a previous withdrawal, including:

Epocrates, Inc. Form S-1 filed on 7/16/10 (file no. 333-168176)
AMC Entertainment Holdings, Inc. filed on 7/15/2010 (333-168105)
Affinion Group Holdings, Inc. Form S-1 filed on 5-21-10 (333-166993)
KKR & Co. L.P. Form S-1 filed on 5-10-10 (file no. 333-166687)