January 6, 2015

CCO Series: Top 12 Regulatory Deficiencies for RIAs -- # 5: Brochure Delivery

What You Need to Know

To our surprise, failure to follow the brochure (aka Form ADV Part 2) delivery rules continues to be one of the most common deficiencies for RIA firms.

Annual distribution of Form ADV Part 2 (along with the privacy policy) is required by all RIA firms. Additionally, an updated version must be delivered to clients when any material changes occur within your business.

A common (and logical) questions we get is “What’s material?” The SEC doesn’t define material, which makes sense since materiality is very much dependent on circumstances. A rule of thumb we use with clients is this: if a knowledgeable client or prospect would expect to be alerted of a change, it’s material. Admittedly, this still leaves a lot open to interpretation (we’ve seen it first hand). Regulators will cast the final vote on this during their next examination, so it usually pays to err on the side of caution.

When material changes do occur, RIAs have the following options:

Option 1: If there have been material changes to your business, they must be described in ADV Part 2, Item 2. Under the current rules, you could provide your clients with a summary of these material changes and an offer to deliver the entire ADV Part 2. In your offer you must include instructions on how clients can obtain a copy from you.

Option 2: Advisors can also opt to deliver a full copy of the entire ADV Part 2. In this instance Item 2 - Material Changes still needs to be updated.

All brochures must be delivered to clients within 120 days of fiscal year end. Electronic delivery will suffice if you are attaching the document to an email. Uploading your ADV to your website and sending a link to clients does not constitute proper delivery. You may lose the ability to show exactly what was delivered to the client.

Why You Should Care

Your brochure informs clients of the details of your firm and any recent material changes that could potentially impact them. You should view your brochure as a publicly-visible sign for your firm, and should be written and updated with this notion of "curb appeal" in mind. Potential and current clients see this brochure as a representation of your firm, and providing them with an up-to-date, accurate brochure signals that you take external communications seriously.

Competitors are reading your firm's brochure as well. A sloppy, outdated, or inaccurate ADV sends a message to competitors that may be damaging when competing for new business.

Our Recommendations

To ensure that your firm is keeping up with regulatory requirements and industry best practices in this area:
  • 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 important issues for regulators.
  • Deliver brochure to clients within 120 days of your fiscal year end
  • Maintain records that demonstrate delivery of Form ADV Part 2 to clients (annually or upon material changes) and prospective clients (prior to executing advisory agreement).
  • Maintain copies of prior versions of your Form ADV Part 1 and 2

AdvisorAssist’s CCO Series: Top 12 Regulatory Deficiencies for RIAs is a series of articles that will help your firm understand and avoid the most common compliance deficiencies found by regulators. Our goal is to help you increase your confidence that your firm remains “exam ready.” Click here to read more posts from our CCO Series: Top 12 Regulatory Deficiencies for RIAs. We would welcome the chance to learn more about you and your firm. Click here to request an introductory call from one of our consultants.


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