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Reviewing the Form ADV

May 24, 2022
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By Ann Keitner, Senior Director

Even though the Form ADV Annual Updating Amendment (“AUA”) is in the rearview mirror, advisors must stay on top of changes in their firm, as well as regulatory updates, that could impact any part of your Form ADV (i.e., the 1A, 2A, 2B, and Form CRS). Like your Compliance Program, your Form ADV is not a “set it and forget it” document. If you have a material change after you have completed your AUA, you are required to promptly update your Form ADV and in some cases redistribute it to your clients. Note that there is a difference between simply updating your ADV and having to make an interim delivery of it to your clients between annual updates.  Specifically, the instructions to the Form ADV Part 2A state that you must update your Brochure “promptly whenever any information in the brochure becomes materially inaccurate.” However, you are only required to deliver an interim amendment to clients if the amendment includes information in response to Item 9 of Part 2A (disciplinary information). Bear in mind, though, that as a fiduciary, “you have an ongoing obligation to inform your clients of any material information that could affect the advisory relationship. As a result, between annual updating amendments, you must disclose material changes to such information to clients even if those changes do not trigger delivery of an interim amendment.

There are some exceptions to that requirement to update your brochure. The instructions note that you “are not required to update your brochure between annual amendments solely because the amount of client assets you manage has changed or because your fee schedule has changed.”

So, what items require an amendment to the ADV? Some feel that “materiality” is in the eye of the beholder, but it is best to think of material changes as those that could have an impact on a client signing on or staying with you. Examples of material changes could include:

  • Offering or removing a service
  • Changes to fees
  • Changing an affiliation
  • The inclusion of a new asset type in the client portfolio that carries new risks (i.e., digital assets)
  • Gaining or removing custody over client assets
  • Adding or removing a custodian
  • Compensation structures (both for the firm and individual investment advisor representatives (“IARs”))
  • Identifying a conflict
  • Disciplinary Items (both for the firm and IARs)
  • Ownership changes
  • Address changes

The SEC’s instructions for both SEC and state-registered advisors are quite concise as to what they consider to be a change that rises to the level of requiring an update to the Form ADV. The instructions as to what constitutes the need for an update include:

  • Item 1 of Form ADV 1A. Your firm’s “Identifying Information” if you have changes in most items in this section you would need to file an update.
  • Item 3 of Firm ADV 1A. Your firm’s “Form of Organization”. If you have changes to your corporate structure, fiscal year, or state where your legal entity is organized you must update your filing.
  • Item 9 of Form ADV 1A, describes the “Custody” practices of your firm. If you gain custody or no longer have custody this section needs to be updated.
  • Item 11 of Form ADV 1A. The “Disclosure Information” for your firm. Any firm or individual items that arise could trigger an update to this section.
  • In addition, the SEC states that if any section of the Form ADV becomes inaccurate it must be corrected promptly. This includes your ADV Part 2A, Appendix 1 (WRAP Brochure), Form CRS and the 2B(s) for your IARs*.

While the AUA is an opportunity for you to review your entire Form ADV and all of its parts for accuracy, you must not forget that when changes occur at your firm or regulatory changes happen in the industry you need to re-examine the Form ADV to see if you need to file an update. The bottom line is – it’s better to be safe and file an other-than-annual Form ADV amendment than to give the regulator an easy reason to issue a deficiency or create an enforcement action. If you have questions about your specific situation, please reach out to your compliance consultant who would be happy to discuss it with you.

*While SEC-registered advisors are not required to file Form ADV 2B(s), a material update would need to be provided to clients of the IAR.

 

 

This article is not a solicitation of any investment product or service to any person or entity. The content contained in this article is for informational use only and is not intended to be and is not a substitute for professional financial, tax or legal advice.