A new version of Form ADV Part 1 was released by FINRA on November 7, 2011.
The next time your firm logs onto the IARD system to file an amendment to your Form ADV Part 1, you will be prompted to answer several new questions and also confirm (re-answer) certain existing questions
Below we have listed the Items that have been updated and summarized many of the changes that were implemented (We focus on the significant changes here. To be certain that your RIA addresses all of the updates thoroughly, it would be best to review with your compliance consultant or attorney.).
Item 1
Item 1 specifically asks advisors to identify contact information for the firm’s Chief Compliance Officer and also provides an option to include one additional regulatory contact person.
Advisors are also now asked the following questions:
ADV Part 1 Item 5 now asks that advisors specifically identify the exact number (as opposed to ranges) of employees that fall into each functional category. We believe that this was partially motivated by an interest in adding clarity to staffing levels among the increasingly large number of smaller RIAs.
This section also now asks advisors about the “percentage of clients that fall into various categories”. The previous version of ADV Part 1 asked only for the approximate percentage that each type of client comprised of the total number of clients. The new version requests the same breakdown but also asks for the approximate amount of regulatory assets under management (reported in Item 5.F. of ADV Part 1) attributable to each type of client.
Advisors should note that the list of client types was expanded and now includes “business development companies,” “other investment advisers”, and “insurance companies.” This higher level of granularity will likely reduce reliance on the "other" category, and improving transparency to investors.
Item 5 also asks advisors to disclose what percentage of their clients are non-United States persons.
Item 6 and Item 7
Working with our clients in the past, we have noticed frequent confusion around the differences between Item 6 and Item 7 of ADV Part 1, specifically regarding when a “business activity” impacts Item 6 versus Item 7.
The list of “business activities” in each of these sections has doubled. While this expansion will likely alleviate some confusion, advisors should carefully review this updated list (particularly the responses related to “broker-dealer” and “registered representatives”.
Item 8
While we’re on the topic, Item 8 now asks for some additional information about your broker-dealer relationships. Specifically, if you have client discretion for broker-dealer selection, Item 8.E. now asks if this broker-dealer a “related person.” This addition further helps identify and disclose potential conflicts of interest.
The new version of the ADV drills down deeper into the benefits that advisors receive from broker-dealers, asking specifically about "soft-dollar benefits." If the advisor does receive "soft-dollar benefits," they are asked to affirm that the service(s) received are eligible under 28(e) of the Exchange Act. This change seems to bifurcate benefits received by participating on an institutional wealth platform and benefits received via soft-dollars.
In addition to asking advisors if they compensate individuals for referrals, the new Item 8 also asks if the advisors themselves are compensated for referrals.
Item 9
For advisors that do have custody of some assets, the new Item 9 drills down into those assets and asks: “If you or your related persons have custody, how many persons, including, but not limited to, you and your related persons, act as qualified custodians for your clients in connection with advisory services?
Item 11
Item 11 relates to disciplinary events. The new version first asks advisors if any of the events described in the disciplinary questions involve you or any of your supervised persons specifically. This broadens the scope of the questions to anyone you supervise.
Item 11 generally requires advisors to describe disciplinary events that involve advisory affiliates, which include:
(1) all current employees (excluding employees performing only clerical, administrative, support or similar functions);
(2) officers, partners, or directors (or any person performing similar functions); and
(3) all persons directly or indirectly controlling you or controlled by you.
If you have any questions about how these changes impact you firm, please do not hesitate to reach out to AdvisorAssist.
Item 1 specifically asks advisors to identify contact information for the firm’s Chief Compliance Officer and also provides an option to include one additional regulatory contact person.
Advisors are also now asked the following questions:
- Are you a public reporting company under Sections 12 or 15(d) of the Securities Exchange Act of 1934? If "yes," provide your CIK number.
- Did you have $1 billion or more in assets on the last day of your most recent fiscal year?
- Provide your Legal Entity Identifier if you have one?
ADV Part 1 Item 5 now asks that advisors specifically identify the exact number (as opposed to ranges) of employees that fall into each functional category. We believe that this was partially motivated by an interest in adding clarity to staffing levels among the increasingly large number of smaller RIAs.
This section also now asks advisors about the “percentage of clients that fall into various categories”. The previous version of ADV Part 1 asked only for the approximate percentage that each type of client comprised of the total number of clients. The new version requests the same breakdown but also asks for the approximate amount of regulatory assets under management (reported in Item 5.F. of ADV Part 1) attributable to each type of client.
Advisors should note that the list of client types was expanded and now includes “business development companies,” “other investment advisers”, and “insurance companies.” This higher level of granularity will likely reduce reliance on the "other" category, and improving transparency to investors.
Item 5 also asks advisors to disclose what percentage of their clients are non-United States persons.
Item 6 and Item 7
Working with our clients in the past, we have noticed frequent confusion around the differences between Item 6 and Item 7 of ADV Part 1, specifically regarding when a “business activity” impacts Item 6 versus Item 7.
The list of “business activities” in each of these sections has doubled. While this expansion will likely alleviate some confusion, advisors should carefully review this updated list (particularly the responses related to “broker-dealer” and “registered representatives”.
Item 8
While we’re on the topic, Item 8 now asks for some additional information about your broker-dealer relationships. Specifically, if you have client discretion for broker-dealer selection, Item 8.E. now asks if this broker-dealer a “related person.” This addition further helps identify and disclose potential conflicts of interest.
The new version of the ADV drills down deeper into the benefits that advisors receive from broker-dealers, asking specifically about "soft-dollar benefits." If the advisor does receive "soft-dollar benefits," they are asked to affirm that the service(s) received are eligible under 28(e) of the Exchange Act. This change seems to bifurcate benefits received by participating on an institutional wealth platform and benefits received via soft-dollars.
In addition to asking advisors if they compensate individuals for referrals, the new Item 8 also asks if the advisors themselves are compensated for referrals.
Item 9
For advisors that do have custody of some assets, the new Item 9 drills down into those assets and asks: “If you or your related persons have custody, how many persons, including, but not limited to, you and your related persons, act as qualified custodians for your clients in connection with advisory services?
Item 11
Item 11 relates to disciplinary events. The new version first asks advisors if any of the events described in the disciplinary questions involve you or any of your supervised persons specifically. This broadens the scope of the questions to anyone you supervise.
Item 11 generally requires advisors to describe disciplinary events that involve advisory affiliates, which include:
(1) all current employees (excluding employees performing only clerical, administrative, support or similar functions);
(2) officers, partners, or directors (or any person performing similar functions); and
(3) all persons directly or indirectly controlling you or controlled by you.
If you have any questions about how these changes impact you firm, please do not hesitate to reach out to AdvisorAssist.
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