More On Legal & Compliancefrom The Advisor's Professional Library
- Risk-Based Oversight of Investment Advisors Even if the SEC had a larger budget and more resources, it is doubtful that the Commission would have the resources to regularly examine all RIAs. Therefore, the SEC is likely to continue relying on risk-based oversight to fulfill its mission of protecting investors.
- Privacy Policies and Rules Whether an RIA is SEC or state-registered, the firm must have policies and procedures in effect to protect clients privacy. Policies and procedures should explicitly require an RIA to send out its privacy notice each year.
In this, the third in our series of columns looking at the latest regulations for advisors from the SEC, let’s look at the new Form ADV disclosure. Is it really different?
We have been using the new format for two months now. If you have been preparing your written disclosure statement properly (fully disclosing your operations, practices, and conflicts—yes, all advisors have conflicts), outside of the new biographical sections (which are a throwback to the retired Schedule D from 13 years ago), the new Form ADV should not be a big challenge. Since we have been crafting our clients’ disclosure documents using plain English narratives for many years, we have found it to be a relatively smooth transition. For many, it will be a rearranging of the deck chairs. For others, I encourage you to take this opportunity to do it right now so you can rest assured that your written disclosure statement will pass regulatory muster.
Form ADV Part 2 has been broken out into two new sections, ADV Part 2A and ADV Part 2B. This amendment to Form ADV will not affect the vast majority of investment advisors until their annual amendments are due.
The New Form ADV Part 2A
The new Form ADV Part 2A, or brochure, takes the place of an investment advisor’s old ADV Part 2 and Schedule F, and is meant to be the investment advisor’s primary disclosure document. The ADV Part 2A contains 18 disclosure items, each to be included in the investment advisor’s brochure. Each disclosure item is to receive a narrative, plain English response.
The new ADV Part 2A attempts to homogenize the way that investment advisors disclose their business practices and conflicts of interest. The intent of the revised Form ADV is to provide investment advisory clients with greater transparency, thereby helping RIAs’ clients to better assess the services, investment strategies, risks and conflicts of interest associated with the selection of a particular investment advisor. The ADV Part 2A must be filed electronically through the IARD system by all advisory firms.
Unlike the old ADV Part 2 and Schedule F, the new ADV Part 2A does not require a section in which investment advisor representatives (IARs) of the firm are listed with their education and business backgrounds. Instead, investment advisors shall be required to provide investment advisory clients with a Form ADV Part 2B, or brochure supplement, for each IAR providing that particular client with advisory services. The brochure supplements must be delivered to the client before or at the time that an investment advisor representative begins to provide advisory services to a client.
A brochure supplement must detail the educational background and business experience of each investment advisor representative, just as the old Form ADV Part 2 and Schedule F previously required. However, unlike the old Form ADV Part 2 and Schedule F, the brochure supplement must also detail any legal or disciplinary events material to a client’s, or prospective client’s, evaluation of the IAR.
When to Give to Clients
There are also new procedural requirements. Under the new requirements, each year, within 120 days of the investment advisor’s fiscal year end, the advisor must deliver or offer to provide an updated brochure to each client. In addition to this requirement, the investment advisor must also provide the client with a summary of material changes, if applicable. The summary of material changes must identify and discuss each material change made to the brochure since the investment advisor’s last annual updating amendment filing. The summary of material changes is a part of each investment advisor’s annual updating amendment and will accompany the entire Form ADV when the investment advisor’s annual updating amendment is filed electronically each year.
So, let the rearranging and drafting begin. Although there is plenty of time for most RIAs, don’t wait until the last minute to commence the process.
Thomas D. Giachetti is chairman of the Securities Practice Group of Stark & Stark, a law firm with offices in Princeton, New York, and Philadelphia that represents investment advisors, financial planners, broker-dealers, CPA firms, registered reps, and investment companies, and a regular contributor to Investment Advisor. He can be reached at firstname.lastname@example.org.