Compliance Solutions for Investment Advisers

FAQs — ADV 2A

 

What is Part 2A of Form ADV?

Part 2A of Form ADV or “firm brochure” is a narrative brochure written in plain English that describes the types of services offered by an investment adviser, the adviser’s fee schedule, disciplinary information, conflicts of interest, and the educational and business background of management and key personnel of the investment adviser. The brochure is the primary disclosure document that investment advisers provide to their clients. When filed, the brochures are available to the public on the Investment Adviser Public Disclosure (IAPD) website.

What is meant by plain English?

An adviser is require to write its brochure in plain English, taking into consideration its clients’ level of financial sophistication. The brochure should be concise and direct. In drafting the brochure an adviser should: (i) use short sentences; (ii) use definite, concrete, everyday words; (iii) use active voice; (iv) use tables or bullet lists for complex material, whenever possible; (v) avoid legal jargon or highly technical business terms unless they are explained or the adviser believes that its clients will understand them; and (vi) avoid multiple negatives. An adviser should consider providing examples to illustrate a description of its practices or policies.

What must be disclosed in Part 2A?

Part 2A requires advisers to address the following substantive areas:

  • Advisory Business
  • Fees and Compensation
  • Performance-Based Fees; Side-by-Side Management
  • Types of Clients
  • Methods of Analysis; Investment Strategies; Risk of Loss
  • Disciplinary Information
  • Other Financial Industry Activities and Affiliations
  • Code of Ethics; Participation or Interest in Client Transactions; and Personal Trading
  • Brokerage Practices
  • Review of Accounts
  • Client Referrals and Other Compensation
  • Custody
  • Investment Discretion
  • Voting Client Securities
  • Financial Information

Are any additional disclosures required?

Under federal and state law, an investment adviser is a fiduciary and must make full disclosure to its clients of all material facts relating to the advisory relationship. As a fiduciary, an adviser also must seek to avoid conflicts of interest with its clients, and, at a minimum, make full disclosure of all material conflicts of interest between the advisory firm and its clients that could affect the advisory relationship. This obligation requires that an adviser provide the client with sufficiently specific facts so that the client is able to understand the conflicts of interest the advisory firm has and the business practices in which it engages, and can give informed consent to such conflicts or practices or reject them. To satisfy this obligation, an adviser therefore may have to disclose to clients information not specifically required by Part 2A or in more detail than the brochure items might otherwise require.

To whom must an investment adviser deliver a firm brochure?

An investment adviser must give a firm brochure to each client. An adviser must deliver the brochure even if its advisory agreement with the client is oral.

Are there any exceptions to the delivery requirement?

If an adviser is registered with the SEC, it is not required to deliver its brochure to either (i) clients who receive only impersonal investment advice and who will pay less than $500 per year or (ii) clients that are SEC-registered investment companies or business development companies (the client must be registered under the Investment Company Act of 1940 or be a business development company as defined in that Act, and the advisory contract must meet the requirements of section 15(c) of that Act). Even if an adviser is not required to give a brochure to a client, as a fiduciary, an adviser may still be required to provide its clients with similar information, particularly material information about any conflicts of interest and about disciplinary information. If an adviser is not required to give a client a brochure, the adviser may make any required disclosures to that client by delivery of its brochure or through some other means.

Is an adviser fund to a hedge or other private fund required to deliver a brochure to investors in the private fund?

Rule 204-3 requires only that brochures be delivered to “clients.” A federal court has stated that a “client” of an investment adviser managing a hedge fund is the hedge fund itself, not an investor in the hedge fund. An adviser could meet its delivery obligation to a hedge fund client by delivering its brochure to a legal representative of the fund, such as the fund’s general partner, manager or person serving in a similar capacity.

When must we deliver an initial brochure to clients?

You must give a firm brochure to each client before or at the time you enter into an advisory agreement with that client.

What are the annual delivery requirements?

Each year you must (i) deliver, within 120 days of the end of your fiscal year, to each client a free updated brochure that either includes a summary of material changes or is accompanied by a summary of material changes, or (ii) deliver to each client a summary of material changes that includes an offer to provide a copy of the updated brochure and information on how a client may obtain the brochure. You do not have to deliver an interim amendment to clients unless the amendment includes information in response to Item 9 of Part 2A (disciplinary information). An interim amendment can be in the form of a document describing the material facts relating to the amended disciplinary event. As a fiduciary, you have an ongoing obligation to inform your clients of any material information that could affect the advisory relationship. As a result, between annual updating amendments you must disclose material changes to such information to clients even if those changes do not trigger delivery of an interim amendment.

Can we deliver our brochure electronically?

Yes. An investment adviser may deliver the brochure electronically provided the client gives informed consent to receiving the information electronically and the client can effectively access the electronically delivered information.

When must we update our brochure?

An investment adviser must update its brochure: (i) each year at the time the adviser files its annual updating amendment; and (ii) promptly whenever any information in the brochure becomes materially inaccurate. An adviser is not required to update its brochure between annual amendments solely because the amount of client assets managed has changed or because the adviser’s fee schedule has changed. However, if an adviser is updating its brochure for a separate reason in between annual amendments, and the amount of client assets manages listed in response to Item 4.E or the adviser’s fee schedule listed in response to Item 5.A has become materially inaccurate, the adviser should update that item(s) as part of the interim amendment. All updates to the brochure must be filed through the IARD system and maintained in the adviser’s files.

Do we need to include the summary of material changes that we prepare in response to Item 2 with our annual updating amendment filing on IARD?

Yes. An adviser must include the summary in its annual updating amendment. Item 2 permits an adviser to include the summary as part of the brochure (on the cover page or the page immediately following the cover page) or to create a separate document containing the summary. If the adviser includes the summary as part of its brochure, the summary will be part of the annual updating amendment filing that is submitted on IARD. If the summary of material changes is a separate document, it must be attached as an exhibit to the brochure and uploaded with the brochure in a single, text-searchable file in PDF Format on IARD. If an adviser includes the summary of material changes in the brochure, and the adviser revises or updates the brochure between annual updating amendments, the adviser should consider whether it should update the summary as part of that other-than annual amendment to avoid confusing or misleading clients reading the updated brochure.

If we offer several advisory services may we prepare multiple firm brochures?

Yes. If an adviser offers substantially different types of advisory services, it may opt to prepare separate brochures so long as each client receives all applicable information about services and fees. Each brochure may omit information that does not apply to the advisory services and fees it describes.

If we sponsor a wrap fee program is there a different brochure that we need to deliver to our wrap fee clients?

Yes. If you sponsor a wrap fee program, you must deliver a wrap fee program brochure to your wrap fee clients. The disclosure requirements for preparing a wrap fee program brochure appear in Part 2A, Appendix 1 of Form ADV. If your entire advisory business is sponsoring wrap fee programs, you do not need to prepare a firm brochure separate from your wrap fee program brochure(s).

May we include information not required by an item in our brochure?

Yes. If you include information not required by an item, however, you may not include so much additional information that the required information is obscured.

 

Important Information

The information contained in this Frequently Asked Questions is only a summary and is not intended to be a comprehensive analysis of the rules and regulations applicable to registered investment advisers. It is not intended to constitute legal or compliance consulting advice or apply to any one investment adviser’s particular situation. For more information, please see our Terms of Use.

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