Form ADV Background Information

Purpose of the Form ADV

The Uniform Application for Investment Adviser Registration (or more commonly known as the Form ADV) is used as the official application document to register as an investment advisor firm. Both the United States Securities and Exchange Commission (SEC) and the state securities regulators require use of the Form ADV as an investment advisor registration document. Once investment advisor registration is granted, the Form ADV must be amended at least annually and whenever material changes occur.

The Form ADV Part 2A can serve as the required disclosure statement that a registered investment advisor must provide to its clients. The Form ADV Part 2A-Appendix 1 Wrap-Fee Brochure must be completed by a registered investment advisor serving as the sponsor to a wrap-fee program.

The North American Securities Administrators Association (NASAA) has posted an interactive Form ADV Part II and Schedules (which requires the use of Adobe Acrobat) for use by registered investment advisors. The PDF formatted Form ADV can be viewed through the NASAA website.

What are the different sections of the Form ADV?
A Dissection of the Anatomy of the Form ADV

1. Part 1A. The Form ADV Part 1A identifies the following information about the registered investment advisor applicant: (a) basic contact information such as the investment advisor’s legal and “doing business as” names, the investment advisor contact person’s name, office address and telephone number of the investment advisor, and office hours of the investment advisor; (b) the basis for a new investment advisor’s SEC registration; (c) the states whereby an SEC registered investment advisor will request notice filing; (d) the investment advisor’s organizational form; (e) description of the investment advisory business; (f) the types of investment advisory clients; (g) the investment advisory fee and compensation arrangements; (h) the types of investment advisory activities; (i) the investment advisor’s other business activities; (j) the location of books and records of the investment advisor; (k) financial industry affiliations of the advisor’s related persons; (l) the investment advisor and its related persons’ involvement in client transactions such as a proprietary or sales interest or use of discretion; (m) whether the investment advisor maintains custody of an investment advisory client’s assets; and (n) whether the investment advisor or affiliate has been convicted of a felony or investment-related misdemeanor, or subject to an adverse regulatory finding, censure or fine, or a court judgment related to violation of investment-related statute or regulation.Technical Note: The SEC and state securities regulators have replaced the old Form ADV Part I with the new version known as the Form ADV Part 1. However, these securities regulators have not yet replaced the current Form ADV Part II with the proposed version known as the Form ADV Part 2.The Form ADV Part 1A also includes several schedules:
   1. Schedule A
      • Lists all of the executive officers which must include Chief Compliance Officer, Chief Executive Officer, Chief Operations Officer, Chief Financial Officer and other C-Level associates;
      • and direct owners of the registered investment advisor with a 5% or more ownership interest.
   2. Schedule B
      • Lists all of the indirect owners with a 25% or more ownership interest of a direct owner;
   3. Schedule D – Lists other miscellaneous information such as:
      • Other business names used by the registered investment advisor;
      • Other office locations;
      • World Wide Web address;
      • Location of books and records;
      • Affiliated registered investment advisors and broker/dealers.
   4. Disciplinary Reporting Page (DRP) – Provides details about felony or investment-related misdemeanor, regulatory discipline, or court judgments related to violation of investment-related statutes and regulations by the investment advisor or its affiliated persons. SEC registered investment advisor firms must only report events occurring within the previous 10 years; however, state registered investment advisors must report events for the time period specified in the DRP.The Form ADV Part 1A and the above referenced schedules are utilized by both the SEC and state securities regulators.
2. Part 1B. The Form ADV Part 1B requests the following information from a state registered investment advisor applicant:
   1. Those states where the investment advisor is applying for registration;
   2. The supervisory and compliance principal;
   3. Information about the surety bond if required by the investment advisor’s home state;
   4. Information about unsatisfied judgment and liens, investment-related arbitrations and civil judicial action; and
   5. Other miscellaneous information.

   The Form ADV Part 1B is not utilized or required by the SEC for federally registered investment advisor applicants.

3. Part 2. The Form ADV Part 2 is a narrative brochure, composed in plain English, that contains information about the advisory firm. Under the SEC and similar state rules, investment advisory firms are required to deliver to clients and prospective clients the Part 2A. Investment advisory firms may also be required to deliver a brochure supplement, Form ADV Part 2B, disclosing information about one or more of your supervised persons. If your investment advisory firm sponsors a wrap fee program, you are required to compose and provide a Part 2A Appendix 1 of Form ADV: wrap fee brochure to your clients and/or prospective clients.To see the Form ADV Part 2 General Instructions, click here for more information.
4. Schedule G. Schedule G is used when a registered investment advisor is required to provide a balance sheet for its most recently completed fiscal year. However, the majority of registered investment advisors will not need to complete the Schedule G, which must only be completed if the firm requires prepayment of more than $500 in fees per client and six or more months in advance. Further, state registered investment advisor firms that maintain custody (as defined by the respective state) may also be required to complete Schedule G.

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. A wrap fee program brochure must be delivered to each client at or before the time the client enters into the wrap fee program contract. Every year your investment adviser firm must deliver within 120 days of fiscal year end a free, updated wrap fee program brochure with a summary of material changes or that is accompanied with a summary of material changes. An investment adviser could also deliver a summary of changes to each client that includes an offer to provide a copy of the updated fee program brochure and information on how to obtain a wrap fee program brochure.

The key determination to whether an investment advisory program is a wrap fee program or an asset allocation program is how fees are charged to clients. Generally speaking, if investment advisory services and custodial/brokerage services are “wrapped” under one fee, the program can be deemed a wrap fee program. This is opposed to a program where the registered investment advisor charges a set investment advisory fee and the custodial/brokerage fees are billed to the client separately.

Of course, this is a general description and other factors of a program must be considered before labeling the service a wrap fee program and completing an Appendix 1 wrap fee program brochure. Another point of distinction that must be made is whether your registered investment advisor is the true sponsor of a wrap fee program or is merely a participant in another registered investment advisor firm’s wrap fee program. Depending on the number of registered investment advisor firms involved in a program and the program’s complexity, it can be hard to determine the true sponsor of the wrap program. But, it is extremely important to know if your registered investment advisor firm does sponsor a wrap fee program in order to complete an Appendix 1 wrap fee program brochure, if required, and properly explain the wrap program to regulators.

Disclosure

The information contained in this Frequently Asked Questions webpage is general in nature and intended for educational purposes only and is not intended to be a comprehensive analysis of the securities regulations applicable to registered investment advisers. It is not intended to constitute compliance consulting advice or apply to any particular investment adviser firm’s specific situation. For more information, please see our Disclosures.