Spring is a busy time for investment advisers because they are required to submit their annual update to the Securities and Exchange Commission (“SEC”). Registered investment advisers, whose fiscal year ends on December 31, 2018, must submit an annual updating amendment to their Form ADV by March 31, 2019.[1] In doing so, they must make full and fair disclosures of all material information related to the firm’s business.
Investment Adviser Registration
Congress enacted the Investment Advisers Act of 1940 (“Advisers Act”) to combat market abuses that contributed to the Great Depression.[2] In 1929, the stock market crashed due to abuses in the securities industry.[3] An Advisers Act Congressional report found that conflicts of interest among advisers prevented them from providing clients with disinterested advice.[4]
Because of the Advisers Act, advisers now must register with either the SEC or a state securities regulator.[5] To register as an adviser, a company needs to file Form ADV to the SEC and follow the form’s instructions.[6] Note that the SEC regulates advisers with $110 million or more in assets under management (“AUM”) and state securities regulators regulate advisers with less than $100 million AUM.[7]
Firms use Form ADV, which consists of forms Part 1 and Part 2, to disclose substantial information about their businesses.[8] Part 1, a check-the-box and fill-in-the-blank form, requires information about the adviser’s business, including “ownership, clients, employees, business practices, affiliations, and any disciplinary events of the adviser or its employees.”[9] Part 2 requires advisers to prepare, in plain English, a narrative brochure that discloses the “types of advisory services offered, the adviser’s fee schedule, disciplinary information, conflicts of interest, and the educational and business background of management and key advisory personnel.”[10]
Form ADV Updates
After registration, advisers are obligated to continuously update the SEC every year. Under Rule 401-1 of the Advisers Act, they are required to “amend their Form ADV at least annually, within 90 days of the end of their fiscal year or more frequently, as required by the instructions to Form ADV.”[11] Part 2 of Form ADV has firms fulfill their fiduciary obligations to their clients, by full and truthful disclosure of conflicts of interest that could affect the advisory relationship, within the brochure summary of material changes.[12]
SEC Guidance for Filers
The SEC has noted that filers of Form ADV make some common mistakes, including inaccurate disclosures and untimely amendments. For example, advisers may, on Form ADV Part 1A or in Form ADV Part 2A, inaccurately report “custody information, regulatory assets under management, disciplinary history, types of clients and conflicts.”[13] In addition, some firms fail to make timely annual amendments or fail to promptly file an other-than-annual amendment when certain information becomes inaccurate or outdated.[14] The instructions to Part 2 of Form ADV require the adviser to file a prompt amendment if material information contained in the brochure becomes inaccurate.[15] However, advisers are not obligated to update if the only change is the amount of AUM or the fee schedule.[16] The adviser must complete all updates to the brochure through the IARD system and maintain the updates on file.[17]
Form ADV submissions must also include a description of the firm’s code of ethics. Within the code of ethics, firms must identify particular access person(s) and ensure that the in-house code of ethics have all required information to prevent untimely submissions of transactions and holdings.[18] While the disclosure obligations may appear burdensome, it is necessary that firms fulfill their reporting obligations to avoid running the risk of an SEC enforcement action.
[1] See Sec. & Exch. Comm’n, Form ADV: General Instructions 3-4, https://www.sec.gov/about/forms/formadv-instructions.pdf.
[2] See Sec. & Exch. Comm’n, Regulation of Investment Advisers by the U.S. Securities and Exchange Commission 1 (March 2013), https://www.sec.gov/about/offices/oia/oia_investman/rplaze-042012.pdf.
[3] Id.
[4] Id. at 8.
[5] See Fin. Indus. Regulatory Authority,Investment Advisers, http://www.finra.org/investors/investment-advisers.
[6] See 17 C.F.R. § 275.204-1 (2016).
[7] See Fin. Indus. Regulatory Authority,supranote 5.
[8] Sec. & Exch. Comm’n, Fast Answers: Form ADV, https://www.sec.gov/fast-answers/answersformadvhtm.html.
[9] Id.
[10] Sec. & Exch. Comm’n, supra note 8.
[11] Sec. & Exch. Comm’n, The Five Most Frequent Topics Identified in OCIE Examinations of Investment Advisers 2, https://www.sec.gov/ocie/Article/risk-alert-5-most-frequent-ia-compliance-topics.pdf.
[12] See, Sec. & Exch. Comm’n, General Instructions for Part 2 of Form ADV, https://www.sec.gov/about/forms/formadv-part2.pdf.
[13] Sec. & Exch. Comm’n, supra note 11, at 3.
[14] Sec. & Exch. Comm’n, supra note 11, at 3.
[15] Sec. & Exch. Comm’n, supra note 12.
[16] Id.
[17] Id.
[18] Sec. & Exch. Comm’n, supra note 11, at 4.
