Form ADV Filing: Is Your RIA Compliant?

Whether you’re starting your own registered investment adviser, or RIA, firm, or your RIA is in need of a Form ADV update, it’s important to ensure that the processes required to do so are completed thoroughly and in compliance with all regulatory requirements, guidelines, and rules. 

Many find that, among all of the tasks and filings necessary for an RIA practice, Form ADV filings can be one of the most complicated. On top of that, SEC and state regulators have been cracking down on RIAs who neglect to provide accurate and timely information on their Forms ADV or CRS. 

On Form ADV, the registrant discloses background information for any individual who will be associated with the firm and explains in detail the business practices that the firm will implement and execute. 

Completion of the Form ADV may require conformance to both state and United States Securities and Exchange Commission (SEC) regulatory standards. There are five parts to the Form ADV: 1A, 1B, 2A, 2B, and 3.

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Parts 1A & 1B

Part 1 of the Form ADV is usually completed online. While specific information regarding individuals is disclosed through Form U4, Part 1 of Form ADV generally discloses information regarding the RIA firm and specific individuals’ roles with the firm. 

Part 1A is required for RIA firms registering with the state, the SEC, or both. Part 1B is required for those firms registering with the state only and not with the SEC. 

Part 1A asks the firm to identify its owners (both direct and indirect), officers, and relying advisors. Additionally, it requires disclosure of any disciplinary events with which the owner or affiliates have been involved. 

Questions about the business are included in Part 1B, which also requires the registrant to select the states in which it desires to register the firm. When applicable, additional disclosure reporting pages (DRPs) are also required in this section, as well. 

Before moving on from Part 1, RIAs must upload the Firm Brochure and Brochure Supplements that will be detailed in Form ADV Part 2. 

Parts 2A & 2B

Part 2 of Form ADV consists of the Firm Brochure and Brochure Supplements, which must be composed by the RIA. 

Part 2A involves the Firm Brochure, which is a narrative describing the RIA’s personnel, services, fees, and any conflicts. There are 18 items requiring disclosure for SEC registrants and 19 items required for state registrants. The advisory business must list its services, specializations, and assets under management (AUM). It must provide a general description of its code of ethics and how that code is made available to the firm’s clients, should they desire it.

Disciplinary and legal events that could factor into a prospective customer’s decision whether to hire the firm must be explained, as well as any conflicts of interest pertaining to an RIA’s personal interests in the same investments that it recommends and how such conflicts are addressed. The RIA’s strategy for analyzing investments and the risk involved with them must be delineated, as well as the risks associated with its recommended investments.

Likewise, the firm’s methods of assessing and recommending broker-dealers must be explained, as well as any referral arrangements. The RIA must supply a fee schedule and specify whether clients will be billed directly or whether fees will be deducted from their accounts, in addition to indicating whether there are any other fees that the clients may have to pay and the nature of each. If the firm allows fees that are performance-based, that must be disclosed in the Firm Brochure, along with any pertinent conflicts and the firm’s plan for dealing with them. 

Part 2B, the Brochure Supplement, pertains to those individuals who will be advising the RIA firm’s clients. Background information must be disclosed, including education, work experience, and professional designations, as well as disciplinary history.

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Any other business activities in which the individuals are involved must be included in Part 2B, as well as any potential conflicts created by those affiliations. When individuals receive additional compensation or other financial benefits from their roles as advisors, that compensation must be included in this section, as well. Finally, the method by which the individual is supervised by the firm and contact information for that person’s direct supervisor is required. 

Part 3

Part 3 of the Form ADV is the Form CRS — a relatively-new addition that was implemented in early 2020. SEC-registered firms serving retail investors are required to complete Form CRS. It is intended to be clear and understandable for an RIA’s clients, and it includes five sections. The first section of the Form CRS is the introduction, wherein the firm states its name and the nature of its registration (i.e., broker or investment adviser).

This section includes a link for retail investors to be directed to the SEC’s website, where they can view additional information about Form CRS. The second section of the Form pertains to relationships and services.

The RIA is required to list and detail the services it provides to retail investors and to provide information pertaining to minimum account size, investment authority, and monitoring. In the third section, the RIA must disclose any additional costs to the investors, such as third-party fees, etc. It must explain how the firm earns its revenue and make further disclosures regarding conflicts of interest and the RIA’s obligations to its clients.

The fourth section includes “yes” or “no” questions regarding required disciplinary history disclosures for the firm or its affiliated individuals on other documents, such as Form U4 or Form ADV Part 1A. The fifth and final section requires the firm to provide sources of additional information and where investors may seek it, including a telephone number for information about the RIA.

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It’s imperative that Form ADV Part 2B remain consistent with Form U4. According to the North American Securities Administrators Association (NASAA), the registration deficiency that it saw most often in 2019 involved inconsistencies between Part 1 and Part 2 of Form ADV.

Your RIA’s compliance department will be responsible for ensuring that the Forms are accurate at the time of their initial filings and that they are updated as required and in a timely manner. Any material changes to the Firm Brochure must be related to firm clients annually.

If you’re in need of compliance consulting regarding your Form ADV or Form CRS, please fill out the contact form below for a complimentary consultation. 

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