Annual ADV Amendment Prep

Main Contributor: Katie Mogan, IACCP® Vice President, Senior Compliance Consultant

Introduction

It’s that time of year again. Annual ADV amendments must be filed by March 31st for advisors with a fiscal year-end of December 31st. Hopefully, you have started a work-in-progress (“WIP”) version of your ADV Part 2A with notes to help you with your Part 1. If not, there’s no better time to start than now! Below we outline some important items to think about as you prepare your annual amendments.

ADV Part 1

Changes to Part 1

This year there is a new section on the ADV Part 1 that corresponds to the new Marketing Rule.  Item 5.L(1) Marketing Activities has a small list of questions around an advisor’s use of marketing including:

• use of performance,

• references to specific investment advice,

• testimonials,

• endorsements,

• third-party ratings,

• whether you pay cash or non-cash for those endorsements, testimonials and/or third-party ratings,

• if your advertisements include hypothetical performance, and

• if your advertisements include predecessor performance.

These responses are not required, meaning your filing will pass a completeness check without answering these questions, but we suggest reviewing these questions and understanding how your firm will answer them now, rather than later.  We suspect certain answers, like using hypothetical performance, predecessor performance, and some others, might raise your risk level with the SEC. Maintaining adequate records and ensuring your compliance manual has updated policies and procedures to address these activities is vital to your annual review.

Important Updates to Review

Before you hit submit on the ADV Part 1, review the past year and any changes that have occurred at your firm. A few material changes that are important to review:

• Were there any disciplinary events for the firm or related persons that must be reported on Item 11?

• Did ownership or roles change, requiring updates to Schedule A and/or Schedule B?

• Did business practices change, new relationships form, or new accounts open causing the firm or a related person to have custody that must be updated in Item 9?

• Did you open or close any private funds that must be reported on Item 7.B?

Preparing Part 2A

Your ADV Part 2A and Part 1 should always “tell the same story” about your firm. If you are making updates to either document, it’s vital to review the other to ensure the same updates are made. If ownership changes on ADV Part 1, Schedule A or B, consider if that update needs to be made on Part 2A, Item 4. Some good questions to consider in your 2A include:

• Were there any ownership changes during the year for Item 4 and potentially a material change?

• Did your fees change? Always make sure your ADV has the most recent fee schedule in Item 5 and the method for calculating fees is clearly disclosed and consistent with actual practice. Also, make sure any “other” fees that clients are responsible for are clearly articulated within Item 5. If you charge a performance fee you must disclose such practice on Item 6.

• Are there any new products or new risks (i.e., cryptocurrency) that must be discussed in Item 8?

• Are there disciplinary events to report in Item 9, and potentially material changes?

• Does the firm or any related persons have new business affiliations or solicitation arrangements that should be disclosed in Item 10 or Item 14?

Lastly, were you examined by the SEC, or did you change your policies and procedures during the year? Make sure necessary changes are carried over to your disclosure documents.

Form CRS

For some, Form CRS will not need any updates and there are no annual filing requirements. However, this shorter, abridged ADV Part 2A does have some data overlap so make sure you take time to review your CRS. If the services you provide, the fees you charge, or employee compensation changes, you must make changes to your Form CRS. In addition, if you have disciplinary events for your related persons, you may have to answer “yes” to Item 4, Disciplinary History. The SEC is not messing around when it comes to the Form CRS. In fact, several firms were fined for having an incomplete form CRS, not filing, or delivering the form as required, and/or not posting it prominently on their website.

Conclusion

For a compliance professional, the first quarter is busy and can feel stressful, but it doesn’t have to be something you dread! Taking time throughout the year to redline ADV drafts as changes occur at your firm and assessing which ADV (maybe both) needs updates will make the process more seamless, because you kept yourself organized. If that’s not the situation you are in this year, don’t panic! Leave yourself enough time to review documents from your annual review and edit your documents all at once. If you would like support or guidance, you can always reach out and we will be happy to help!