It appears that many investment advisers are still unclear about the intent and use of Form ADVs. The purpose of this post is to provide a Form ADV primer.

Introduction to the Form ADV
Form ADV Part 1 contains registration information. ADV Part 2A of the Form ADV is the information that must be provided to clients as required by the Brochure Rule, found in Rule 204-3 under the Investment Advisers Act.

There are several schedules that accompany ADV Part 1:

  • Schedule A lists all of an advisory firm’s executive officers, including the CEO, CCO, COO, CFO, and other C-level associates. On Schedule A, investment advisers must also list direct owners of the firm who hold more than a five percent ownership interest.
  • Schedule B lists every indirect owner who holds more than a 25 percent ownership interest of a direct owner.
  • Schedule D lists other important information, such as the investment adviser’s web address, affiliated advisers and broker-dealers, other business names, additional offices, and the location of the firm’s books and records.

Form ADV Part 2A is often labeled as the investment adviser’s brochure. It is a narrative statement written in plain English, which describes an investment adviser’s advisory services, fee schedule, disciplinary history, experience, and other important information. The information found in an investment adviser’s brochure helps investors to choose an advisory firm. To protect investors, securities regulators expect full and accurate disclosure of the required information.

Form ADV Part 2B is the narrative brochure supplement that discloses vital information about the advisory firm’s Investment Adviser Representatives (“IARs”). The document is commonly referred to as a Brochure Supplement.

Though ADV Parts 2A and 2B are written as narratives, they must use a rigid approach. There must be separate responses to all of the required items in the order they are listed.

Form ADV Part 2A Brochures
In the Form ADV Part 2A, investment advisers must disclose a great deal of information, including, but not limited to:

  • Actual and potential conflicts of interest;
  • Compensation arrangements with solicitors and other service providers;
  • Advisory fees;
  • Investment strategies;
  • Services;
  • Use of soft dollars;
  • How the firm handles trade errors; and
  • Whether the firm votes proxies on behalf of clients.

Brochures must be delivered to each of the firm’s clients at the inception of the relationship. If an investment adviser is registered with the SEC, a firm is not required to deliver its brochure to:

  • Clients who only receive impersonal investment advice from the firm and pay less than $500 per year in fees; or
  • Clients that are SEC-registered investment companies or business development companies.

Once the initial brochure has been provided to clients, there is no annual delivery requirement unless there are material changes to the investment adviser’s brochure since its last annual updating amendment. If there are material changes, an investment adviser has 120 days from the end of its fiscal year to deliver either:

  • A current brochure; or
  • A summary of material changes to its brochure with an offer to provide a copy of the full brochure upon request.

A change is material if there is a substantial likelihood that a reasonable client or investor would consider the information to be important.

An investment adviser must update its brochure:

  • Each year at the time the firm files its annual updating amendment; and
  • Promptly whenever any information in the brochure becomes materially inaccurate.

Investment advisers are not required to update their brochures between annual amendments if the only reason for doing so is a change in their assets under management (“AUM”) or their fee schedules have changed. If the investment adviser is updating its brochure for a different reason in between annual amendments, the firm should update its AUM and fee schedule when filing an interim amendment. All brochure updates must be filed through the IARD system and retained in the firm’s files.

Item 9 of Form ADV Part 2A requires investment advisers to provide disciplinary information to clients. Many advisers seem to be confused about when to notify clients about changes in their response to Item 9. Firms must deliver an updated brochure whenever the investment adviser amends its brochure to add a disciplinary event or to change material information disclosed previously in response to Item 9 of Part 2A. In the alternative, an investment adviser can deliver a document describing the material facts related to the disciplinary event. This stringent delivery requirement reflects the SEC’s belief that disciplinary disclosure is of the utmost importance, because it impacts the client’s trust and confidence in the adviser.

Additional Information Relating to Form ADV Part 2A
Item 8.B of ADV Part 2A requires an investment adviser to explain the material risks for each significant investment strategy or method of analysis that the firm utilizes. Nevertheless, an investment adviser that utilizes pooled investment vehicles need not duplicate the risk disclosures contained in a prospectus or other offering document for the pooled investment vehicle. An investment adviser can briefly explain the material risks for each strategy and then refer clients to the prospectus, offering memoranda, or other documents that thoroughly discuss the risks.

An investment adviser utilizing multiple significant investment strategies or methods of analysis must explain the risks for all of them. An investment adviser can satisfy this requirement by giving a summary of the strategies and methods, as well as their material risks, and then referring clients and prospective clients to a separate disclosure document.

Form ADV Part 2B Brochure Supplements
Generally, investment advisers must prepare a brochure supplement for the following supervised persons:

  • Any supervised person who formulates investment advice for a client and has direct client contact; and
  • Any supervised person who has discretionary authority over a client’s assets, even if the supervised person has no direct client contact.

SEC-registered investment advisers are not required to file brochure supplements on the Web IARD system. State securities regulators do, however, require brochure supplements to be filed on the system. Even if an investment adviser is not required to file brochure supplements, it must retain copies of them. Brochures must be filed promptly whenever any information in them becomes materially inaccurate.

A brochure supplement is not required for a supervised person with no direct client contact and who only has discretionary authority over a client’s assets as a member of a team of advisers. In addition, if discretionary advice is provided by a team comprised of more than five supervised persons, brochure supplements need only be provided for the five supervised persons with the most significant responsibility for the day-to-day discretionary advice provided to the client.

Investment advisers must deliver the supplement for a supervised person before or at the time that supervised person begins to provide advisory services to a client. Delivery of brochure supplements is not required with clients who are not entitled to receive a firm brochure or a wrap fee brochure. In addition, investment advisers are not required to deliver brochure supplements to clients who receive only impersonal investment advice, even if they receive a firm brochure. Furthermore, investment advisers are not required to deliver brochure supplements to anyone classified as a “qualified client.” The SEC has also said that it would not recommend enforcement action if an investment adviser does not deliver a brochure supplement for a supervised person who is only providing advisory services on a temporary basis.

When it prepares brochure supplements for supervised persons, an adviser may not bundle the information together. Each supervised person must have a separate and distinct brochure supplement. Each brochure supplement must contain separate responses to each of the seven (six for SEC RIAs) items required to be addressed.

Item 2 of ADV Part 2B permits the listing of professional designations if they are accompanied by sufficient explanation of the minimum qualifications for each designation. The purpose of this requirement is to ensure that clients understand the value of the designation. An investment adviser may refer the client to the organization’s website if it reasonably believes that the information provided there is accurate and not misleading. An investment adviser may not use brochure supplements that simply refer clients to a website without explaining the minimum qualifications for each designation.

Once ADV Part 2Bs are delivered to clients, investment advisers do not need to offer or deliver them annually. An investment adviser only has to deliver an updated brochure supplement if there is a new disciplinary event that must be disclosed or a material change to disciplinary information disclosed previously in Item 3 of ADV Part 2B. If that occurs, the firm must send to clients an updated brochure supplement or a sticker to notify them that disciplinary information for the firm and/or the supervised person has changed or is inaccurate. This sticker, which should be dated, must disclose the new information.

If the updated brochure supplement is sent electronically, the firm may disclose that the supervised person has been involved in a disciplinary event. The investment adviser can provide a hyperlink to the BrokerCheck or IAPD systems. For clients who have not agreed to electronic delivery, the delivery of the BrokerCheck or IAPD report does satisfy the delivery requirement for disciplinary events.

About RIA Compliance Group: RIA Compliance Group is an investment adviser compliance consulting firm based in Boca Raton, Florida. The firm’s mission is to provide affordable, timely, practical, and cost-effective compliance advice. We help investment advisers to comply with the myriad of state and SEC regulations and compliance obligations facing their firms. RIA Compliance Group takes pride in giving personal service and real world compliance advice, not theoretical concepts and legalese. The firm interacts on a daily basis with SEC and state securities regulators.

RIA Compliance Group, LLC – 5301 North Federal Highway, Suite 380, Boca Raton, FL 33487 –
Tel: 561-600-0564 –