RIA Compliance and Practice Management Blog

A Guide to Form ADV Filings for Registered Investment Adviser Firms

Posted by RIA in a Box

Mar 31, 2021 2:05:42 PM

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One of the most complicated parts of starting a registered investment adviser (RIA) firm is constructing your firm’s Form ADV filings, specifically the Form ADV Part 1A, Part 1B, Part 2A, Part 2B and Part 3 (a.k.a., Form CRS).

These forms will detail your new firm's business practices and background of individuals associated with the firm. These documents must conform to the specific regulatory standards of the relevant state(s) or the SEC.

One of the most important tasks of any compliance department is ensuring your firm’s Form ADV is accurate and updated.

The most common registration deficiency found by the North American Securities Administrators Association (NASAA) during audits in 2019 was mismatched Form ADV sections. Though trending downward since 2017, the numbers still don’t look good for Part 1 matching match up with Part 2.

Today, we’re going to look at the five parts of the Form ADV and what is included in each section.

Form ADV Part 1A

The Form ADV Part 1 is the online component of Form ADV. It primarily discloses information about the firm, whereas individual information is primarily disclosed in the Form U4.

Part 1A is required whether you’re registering with the state or the SEC.

This portion of Form ADV asks a lot of “who” questions, primarily centered around the owners and advisors at your firm. Among other items, Part 1A asks for information about:

  • your direct owners and executive officers
  • your indirect owners
  • your relying advisors
  • disciplinary events involving you or your advisory affiliates

The Form ADV Part 1 is also the vehicle to upload your Firm’s Form ADV Part 2A (Firm Brochure) and Form ADV Part 2Bs (Brochure Supplements). Exempt reporting advisers, as opposed to RIAs, are required only to complete certain sections of Part 1 and do not complete Parts 2 or 3.

Form ADV Part 1B

Part 1B is only required if you are registering with state authorities, not the SEC. If you are filing online and do not need to fill out Part 1B, it won’t even show up for you. It consists of additional Disclosure Reporting Pages (DRPs), as well as additional questions about your business. It also contains the section that allows you to choose the specific states in which you are registering.

Form ADV Part 2A

Part 2A requires you to write a narrative brochure where you’ll lay out information about your firm’s services, fees, conflicts, and personnel. The instructions require 18 disclosure items (19 for state-registered firms), which must be included in the brochure. Advisors must inform clients annually of any material changes made to this document.

Below is a non-exhaustive list of what your brochure must include:

  • Advisory business – List your services, any specializations, and AUM
  • Fees and compensation – Provide a fee schedule and explain whether you bill your clients or directly deduct your fees from client accounts. You must also disclose any other fees or expenses clients might have to pay.
  • Performance-based fees and side-by-side management – If your RIA accepts performance-based fees, then you must disclose that here, along with the associated conflicts of interest and how you address them.
  • Methods of analysis and investment strategies – Lay out how you analyze investments and the risk that clients bear by investing. You must also explain risks of the investments you recommend.
  • Disciplinary information – Detail any legal or disciplinary events that would be germane to a client’s decision-making process when deciding to hire you or not.
  • Code of ethics, participation or interest in client transactions, and personal trading – Give a quick overview of your code of ethics and explain how clients can obtain a copy if they want it. In addition, you must disclose if you have personal interests in any recommended investments, trade in the same funds as clients, or trade at the same time in funds as clients, as well as how you handle those conflicts of interest.
  • Brokerage practices – Here, you must lay out how you evaluate and recommend broker-dealers. In addition, you must disclose how you handle “soft dollar practices,” referrals, directed brokerage, and trade aggregation.

Form ADV Part 2B

Form ADV Part 2B (a.k.a., the “brochure supplement”) contains required information about the individuals providing financial advice at your firm. It should be consistent with Form U4 in all material respects.

Part 2B covers five main areas:

  1. Background information – Educational history, business experience, and professional designations.
  2. Disciplinary history – information that would be material to a prospect’s or client’s evaluation of the individual (along with some additional information for state-registered firms)
  3. Other business activities – Other business activities and any resulting material conflicts of interest.
  4. Additional compensation – Any other economic benefits earned by the individual for fulfilling an advisory role.
  5. Supervision – How this individual is supervised by your firm, as well as the direct supervisor’s contact information.

Form ADV Part 3 (Form CRS)

Part 3, better known as “Form CRS,” was added in the spring of 2020 for firms registered with the SEC that serve retail investors. In short, the Form CRS is a non-technical document, written in plain language and intended to be easily understood by clients.

Part 3 has a fairly prescriptive format, with specific FAQs, “conversation starters,” and headings. It must contain five sections:

  1. Introduction – state the firm name, how you are registered (broker-dealer or investment adviser), and direct retail investors to https://www.investor.gov/CRS for more information.
  2. Relationships and Services – list the particular types of principal investment advisory services offered to retail investors, plus information regarding monitoring, minimum account size, and investment authority
  3. Fees, Costs, Conflicts, and Standard of Conduct – describe fee arrangements (e.g., ongoing asset-based fees, fixed fees, hourly fees, performance-based fees, etc.), identify additional costs (including third-party fees), state how your RIA makes money, list conflicts of interest, and disclose your obligation to clients as an investment adviser.
  4. Disciplinary History – state yes or no, depending on whether your firm or its personnel have disciplinary disclosures on certain other documents such as Form U4 or Form ADV Part 1A.

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      5. Additional information – note where the retail investor can find additional information, plus include a                  telephone number to request more details about the RIA.

 

Need help creating your Form CRS? Click here to see how RIA in a Box can help.

That covers it for your Form ADV. Like we said above, it is an expansive, detailed document and compiling yours can be an overwhelming process.

For more information on the Form ADV, check out the SEC’s General Instructions and Glossary for the Form ADV.

 

Topics: RIA Operations, RIA Compliance, RIA Technology

RIA in a Box LLC is not a law firm, investment advisory firm, or CPA firm. RIA in a Box LLC does not provide legal advice or opinions to any party or client. You should always consult your relevant regulatory authorities or legal counsel if applicable.

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