Compliance Solutions for Investment Advisers

Common Compliance Deficiencies – Failure to Disclose

An investment adviser has a fiduciary duty to act in the best interests of its clients. A central tenant of this duty is full and fair disclosure of all material facts to clients. What you tell your clients about your business – and whether you conduct your business consistent with the disclosures you make to your clients – goes to the heart of your fiduciary duty. Examiners review Form ADV to see how you describe your business – especially those business practices that create potential conflicts of interest between you and your clients. Any discrepancies between the written disclosure and actual practice, or any inaccurate, incomplete, or untimely materials, indicate weak internal control processes and will heighten scrutiny by examination staff.

Common disclosure problems:

  • An adviser who does not discuss its current business practices in its brochure, such how it allocates bunched orders, or that shares of hot IPOs will be allocated only to clients with an “aggressive” investment style.
  • An adviser who fails to disclose to all potential and actual clients that it waives or negotiates fees.
  • An adviser who fails to disclose that it places trades with an affiliated broker or places trades with a broker in exchange for client referrals.

To avoid these problems:

  • Ensure that disclosure is timely and accurate .
  • Undertake an annual in-depth review of Form ADV and any other written material provided to clients and the public.
  • Ensure that your disclosure documents are consistent with your advisory agreements and your marketing material.

We suggest taking the instructions to the ADV Part 2A and using that as a checklist for determining whether you have made all required disclosures.

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