More On Legal & Compliancefrom The Advisor's Professional Library
- The Need for Thorough and Effective Policies and Procedures Whethere an advisor is SEC or state-registered, RIAs must revise their policies and procedures to address significant compliance problems occurring during the year, changes in business arrangements, and regulatory developments.
- Code of Ethics Rule The Code of Ethics Rule, found in Rule 204A-1, uses severe consequences for violation to help ensure investment advisors will do the right thing.
The new Form ADV Part 2A, or Brochure, shall take the place of an investment advisor’s old ADV Part 2 and Schedule F. ADV Part 2A contains 18 disclosure items, each to be included in the investment advisor’s Brochure, and each to receive a narrative, plain English response. There is significant overlap between the required content of the new ADV Part 2A and the content that was required by the old ADV Part 2 and Schedule F. The intent of the revised Form ADV is to provide investment advisory clients with greater transparency, thereby helping clients better assess the services, investment strategies, risks and conflicts of interest associated with a particular investment advisor. The ADV Part 2A must be filed electronically through the Investment Adviser Registration Depository system by all investment advisory firms.
Unlike the old ADV Part 2 and Schedule F, the new ADV Part 2A does not require a section in which investment advisor representatives of the firm are listed with their education and business backgrounds. Instead, investment advisors shall be required to provide investment advisory clients with a Form ADV Part 2B, or Brochure Supplement, for each representative who provides that particular client with advisory services. The Brochure Supplements must be delivered to the client before or at the time a representative begins to provide advisory services to a client.
A Brochure Supplement shall detail the educational background and business experience of each investment advisor representative, just as the old Form ADV Part 2 and Schedule F previously required. However, unlike the old Form ADV Part 2 and Schedule F, the Brochure Supplement must also detail any legal or disciplinary events material to a client’s, or prospective client’s, evaluation of the investment advisor representative.
All investment advisors registered with the Securities and Exchange Commission as of Dec. 31, 2010, and who have a fiscal year ending on Dec. 31, 2010 through April 30, 2011, have until July 31 to begin delivering Brochure Supplements to new and prospective clients. By Sept. 30, these advisors must deliver Brochure Supplements to all existing clients. The compliance due dates for delivering Brochure Supplements for existing registered investment advisors with fiscal years ending after April 30, 2011 shall be their ADV Part 2A deadline—120 days after their firm’s fiscal year end.
There are also new procedural requirements. Under the new requirements, each year, within 120 days of the investment advisor’s fiscal year end, the advisor must deliver or offer to provide an updated Brochure to each client. In addition to this requirement, the investment advisor must also provide the client with a Summary of Material Changes, if applicable. The Summary of Material Changes must identify and discuss each material change made to the Brochure since the investment advisor’s last annual updating amendment filing. The Summary of Material Changes is a part of each investment advisor’s annual updating amendment and will accompany the entire Form ADV when the investment advisor’s annual updating amendment is filed electronically each year.
The SEC has also advised Stark & Stark that the annual offer of your written disclosure statement will not suffice for 2011. Due to the substantive changes each advisor’s disclosure statement must undergo as part of the new Part 2A and Part 2B format, all SEC-registered investment advisors must, in lieu of an annual offer, deliver to advisory clients their initial ADV Part 2A, as well as all relevant ADV Part 2Bs. Advisory clients must receive the advisor’s Part 2A within 120 days of the investment advisor’s fiscal year end (May 31 for those advisors with a Dec. 31 fiscal year end).