Part 2 of Form ADV (specifically Item 9 of Part 2A) requires a registered hedge fund manager to disclose all “material facts about any legal or disciplinary event that is material to a client’s (or prospective client’s) evaluation of the integrity of the adviser or its management personnel.” In contrast to the check-the-box disclosures regarding disciplinary history required by Part 1 of Form ADV, the disciplinary disclosures required by Item 9 of Part 2A must be made in narrative form and in plain English. Item 9 requires a registered hedge fund manager to disclose all material facts about a disciplinary event involving the firm or any of its “management persons” if that event is material to a client’s evaluation of the firm or its management persons. Items 9A, B and C provide a list of disciplinary events that are presumed to be material and must be disclosed unless, among other things, the hedge fund manager can rebut the presumption of materiality. Rebutting the presumption is important for hedge fund managers because disclosing disciplinary events can undermine capital raising, obscure other achievements (even a good track record
), monopolize due diligence conversations and give risk-averse institutions a reason not to invest or to redeem. Therefore, this article discusses how registered hedge fund managers can rebut the presumption of materiality in determining what disciplinary events must be disclosed in Item 9. This article begins with a discussion of Item 9, including a listing of disciplinary events presumed to be material as well as an explanation of key definitions that inform the required disclosures. The article then explains the four factors that registered hedge fund managers should use in evaluating whether they can rebut the presumption of materiality and applies the factors to specific scenarios. Next, the article discusses best practices for documenting determinations rebutting the presumption of materiality. In addition, the article examines: other disciplinary events to be disclosed in Item 9 (even though not specifically listed); the materiality standard; other areas where a hedge fund manager must make disciplinary disclosures; consequences for omitting disciplinary information required by Part 2; and best practices for gathering disciplinary information about a firm’s advisory personnel.