RIA Compliance Blog
For the majority of investment advisers registered with either the SEC or state regulators, annual updating amendment season is once again upon us. Advisers whose fiscal year ends on December 31 are required to file their Form ADV annual amendment within 90 days or by March 31, 2023.
While investment advisers are under a continuing obligation to update their disclosure documents when certain or material information becomes inaccurate, the annual update is a universal requirement designed to ensure that the filing information for investment advisers is up to date. This serves an important function in that it allows clients and potential clients to review the publicly filed ADVs for investment advisers on FINRA’s BrokerCheck and the SEC’s IADP. Additionally, regulators review the filings and the underlying analytics to track industry trends, plan examination targets, and conduct regulatory sweeps.
During the annual updating amendment process, advisers are required to update ADV Part 1A, 1B (if applicable), 2A, 2B (if applicable), and Part 3 (if applicable). While the forms include much of the same topics and materials, the format and purposes of the forms differs.
Part 1 is designed with a fill in the blank format and contains information about the advisory business, ownership structure, clients, employees, relationships and affiliations, and relevant disciplinary history. Advisers may have to consult with custodians, sub-advisers, and other service providers to help collect the data needed for the ADV. The information provided by the adviser should disclose the adviser’s business as of December 31 rather than when the form is completed.
Alternatively, Part 2A covers many of the same topics as Part 1 but is constructed to be completed in a narrative format. As directed by the SEC, Part 2 disclosures should be written in “plain English” to promote effective communication The General Instructions for Part 2 of Form ADV includes drafting instructions that the brochure should “use short sentences, use definite, concrete, everyday words, use active voice, use tables or bullet lists for complex material, avoid legal jargon or highly technical business terms unless you explain them or you believe that your clients will understand them, and avoid multiple negatives.” If revisions are made to Part 2A, then a summary of the material changes should be included as Item 2 of the filed Part 2A. The summary of material changes should reflect all revisions since the last annual updating amendment and not just those revision since the most recent other than annual amendment.
Due to the overlapping nature of Part 1 and Part 2A, advisers should ensure that the information disclosed is consistent across the multiple forms. Inconsistent information is a red flag for regulators and can lead to regulatory inquiries, examinations, and enforcement actions.
The annual updating amendment is important for advisers transitioning between SEC or state registration. If an adviser meets at least one of the conditions for SEC registration contained in Item 2.A, then the adviser is required to apply for SEC registration within 90 days of the annual updating amendment’s submission. Conversely, advisers who are no longer eligible for SEC registration must withdraw their registration by filing an ADV-W within 180 days of the end of the adviser’s fiscal year end. Due to the subsequent filing deadline, transitioning advisers should be mindful of when the annual updating amendment is filed to ensure that they have enough time to complete the transition within the required timeframe.
Investment advisers must deliver to each client, annually within 120 days after the end of their fiscal year, either a copy of the current brochure or a summary of the material changes with instructions on how the client can obtain a full copy without charge.
Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds, and issuers of securities, among others. Our Investment Adviser Group assists financial service providers with complex issues that arise in the course of their business, including complying with federal and state laws and rules. Please visit our Investment Adviser Practice Group page for more information.