As the annual ADV filing deadline approaches, advisors must prioritize updating their Form ADV to ensure compliance with regulatory standards and uphold the principles of loyalty and care towards clients. In accordance with federal and state securities regulations, both SEC and State Registered Advisers must file the Annual Updating Amendment of Form ADV within 90 days of their fiscal year-end. Advisers with a fiscal year-end of December 31, 2023, must file the Amendment by or before March 30, 2024. At Core Compliance, we understand the importance of transparent disclosures and offer essential reminders and tips to effectively streamline your annual ADV update.
Form ADV Part 1
The ADV Part 1 follows a check-the-box and fill-in-the blank format. This section of the ADV provides information about the investment advisor’s business, ownership, clients, employees, affiliations, and any disciplinary events that may have occurred.
Tips:
- Determine your business model, including advisory services and client demographics.
- Consider how you advise your clients, such as on a discretionary or non-discretionary basis.
- Consider what types of clients you service, and what types of fees you charge, such as flat, hourly, percentage, or performance-based fees.
Form ADV Part 2A – Brochure
For Part 2A of the ADV, the format is narrative form, and the information provided must be in “plain English,” meaning straightforward and easy for anyone to understand, whether or not they are in the industry. While Part 1 primarily focuses on the advisor’s business practices, ownership, and disciplinary history, Part 2A provides detailed information about an advisor’s services, fees, conflicts of interest, brokerage practices, promoters, voting, and custody information.
Tips:
- Develop a clear, plain English brochure detailing conflicts of interest mitigation strategies, outside business activities, and compensation structures.
- Describe your advisory business comprehensively, covering services offered, AUM, and ownership details.
- Detail fees and compensation structures transparently, including any additional costs associated with advisory services.
- Describe investment strategies, risk factors, and disciplinary information per regulatory requirements.
- Provide insights into brokerage practices, including broker selection criteria and compensation arrangements.
- Describe referral compensation arrangements to include promoters.
- Identify and elaborate whether the firm has proxy voting obligations.
Form ADV Part 2A, Item 2 – Material Changes
If the Form ADV Part 2A is amended, advisors are required to disclose any material changes to clients or prospective clients. Material changes are alterations to the information contained in the Form ADV Part 2A that would reasonably affect a client’s decision to engage the advisor’s services or continue their advisory relationship. This could include items such as changes in advisory services, changes to an advisor’s fee structure, or key personnel changes, to name a few.
Tips:
- Conduct a conflict-of-interest inventory assessment to include OBAs.
- Scrutinize Form U4s for reportable disciplinary events.
- Review compensation and promoter arrangements for disclosure considerations.
- Ensure disclosures facilitate informed client consent.
Form ADV Part 2B – Brochure Supplement
The Brochure Supplement has 6 parts and provides information about an advisory professional in a “resume-like” style, focusing specifically on the background, qualifications, and business practices of key personnel in an advisory firm. The Brochure Supplement is prepared for advisory personnel who interact with clients, formulate investment advice, or have discretionary authority over client assets, even if they do not interact directly with clients.
Tips:
- Prepare brochure supplements for personnel interacting with clients or managing client assets, ensuring timely updates for personnel changes or disciplinary events.
- Utilize questionnaires and/or periodic attestations/certifications from advisory personnel.
- Thoroughly review personnel backgrounds and Form U4s.
- Interview individuals requiring brochure supplements.
Form CRS – Client Relationship Summary (ADV Part 3):
The ADV Part 3, otherwise known as Form CRS, was adopted by the SEC in June of 2019 as an additional requirement for advisors with retail clients and services. Form CRS is a 2-page, plain English summary with standardized headings and subheadings to help investors navigate the document and find relevant information easily. It covers essential aspects of client-advisor relationships and services, including fees, conflicts, and disciplinary history.
Tips:
- Develop a concise, plain English summary covering essential aspects of client-advisor relationships, fees, conflicts, and disciplinary history.
- Ensure advisory contracts are consistent with Form ADV updates.
- Review fee structures to ensure compliance with SEC regulations and accurately reflect disclosed information.
- Consider disclosures related to valuation processes, billing practices, fee changes and the definition of “household” for purposes of achieving a tiered fee breakpoint.
Conclusion
In conclusion, Form ADV disclosures serve as the cornerstone of transparent client-advisor relationships, facilitating informed decision-making and regulatory compliance. By adhering to these guidelines and tips, advisors can navigate the complexities of ADV updates with confidence. If you need further assistance or clarification on the Form ADV Annual Amendment requirement, don’t hesitate to reach out to Core Compliance at (619) 278-0020 or contact us here for guidance and support.
Author: Apryl Thompson, Compliance Consultant; Editor: Maggie Tavares, Sr. Compliance Consultant; Core Compliance & Legal Services (“Core Compliance”). Core Compliance works extensively with investment advisers, broker-dealers, investment companies, and private fund managers on regulatory compliance issues.
This article is for information purposes and does not contain or convey legal or tax advice. The information herein should not be relied upon regarding any particular facts or circumstances without first consulting with a lawyer and/or tax professional.