January 27, 2013

The AdvisorAssist CCO Series: Regulatory Filings (Form ADV Parts 1 and 2, U4)

If the sign on the front of your office got damaged or worn out, you'd replace it, right?

Think of your ADVs (both Part 1 and Parts 2A-2B) and Form U4 as the most visible aspects of your RIA firm. Prospects, clients, competitors, vendors and regulators can (and do) look at it whenever they want. Each of these audiences have different motivations for looking at these filings but they have one thing in common: they will come away with an opinion of your firm.

Beyond being a regulatory requirement, well-drafted and maintained public filings are the easiest way for you to make a good impression on anyone that has an interest in your advisory firm. Over the years we have seen countless ADVs that scream "I found the cheapest person I could find to write this." or "I bought a template off the internet because this is all boilerplate anyway." Regulators will eventually notify you of their opinion of your regulatory filings during an examination. In the interim, there will be countless first impressions that will be made.

And most people won't tell you if your sign's worn out.

Form ADV and Form U4 In a Nutshell

Investment advisors are responsible for ensuring that their Form ADV Parts 1 and 2 are up-to-date and reflective of their current business model. In any given year, data points like regulatory assets under management and the number of advisory clients/accounts must be updated. Likely, the types of clients that you serve and the states where they reside will also require updating. In addition, advisors should ensure they are updating their ADVs for changes in securities laws or regulatory hot points as well.

Any material changes in your business throughout the year will require an immediate update, as well as client notification of the material changes. Materiality is not specifically defined by the regulators, but here's a good rule of thumb: if something changes in your firm that an informed client would expect to be notified of, then it's material.

Form U4s for each of your Investment Advisor Representatives ("IARs") must also be kept up-to-date. Examples of U4 updates include: ensuring that licensing is maintained and up-to-date, confirming that your IARs are properly registered in all states where they perform advisory functions, adding outside business activities, and updating for any disclosure events that may occur.

In the age of social media, it is also imperative that the U4s are accurate and consistent with any other published information about your IARs. For instance, if there is inconsistency between a U4 and a LinkedIn profile, did you post a false advertisement or did you file a false regulatory document?

Through the Regulator's Eyes

Regulators expect that your ADV will always reflect up-to-date and comprehensive information that your clients and prospects deserve to know about your RIA. Clients and prospects should be able to see a comprehensive description of the fiduciary role that you fulfill, as well as all business practices and conflicts of interest that may impact your ability to serve as their fiduciary.

They also expect to see evidence that you have delivered your ADV to all clients (annually) and prospects (prior to executing advisory agreement). Remember, regulators must take a stance that "if it's not documented, it didn't happen."

Regulators also want to see past versions of your ADV so that they are able to reconstruct exactly what was delivered to whom at any given point in time.

CCO Best Practices

  • If you utilized a "template" to create your ADV or if you hired a firm that follows a "one size fits all" approach, review your ADV to ensure that it reflects your business, including disclosures for conflicts of interest, outside business activities, advisory services, and advisory fee practices. These are all hot buttons that are often poorly captured in "out of the box" ADVs.
  • Update Form ADV Parts 1 and 2 at least annually, within 90 days following your fiscal year end. Update your ADV more frequently for any "material" changes in your RIA.  (Materiality is not defined by the SEC but a knowledgeable compliance professional.
  • Deliver your Form ADV Part 2 (or a summary of material changes since the previous delivery) to all clients within 120 days following your fiscal year end. Electronic delivery will suffice.
  • Consider including your Privacy Policy at the end of same as the ADV2 ("Disclosure Brochure") document to simplify the document delivery requirements. Your Privacy Policy must be delivered at/prior to client engagement and annually. One less document to worry about.
  • Maintain records that demonstrate delivery of Form ADV to clients (annually) and prospective clients (prior to executing advisory agreement)
  • Maintain copies of prior versions of your Form ADV Part 1 and 2
  • If you take on clients throughout the year that require registration or notice filing in any new states, this should be completed prior to on-boarding these clients. Otherwise, updating the states listed on your ADV 1 through your annual amendment is sufficient.

The AdvisorAssist CCO Series is a collection of blog posts that cover each of the elements of your RIA's compliance program. Each post will provide an overview of one compliance topic, including our insights on how regulators view each topic as well as some practical steps to help Chief Compliance Officers address this topic. As always, we would welcome your comments and thoughts.

Brian Lauzon


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