Annual Form ADV Review Checklist
It’s that time of year again – time to prepare for your annual Form ADV Review.
Disclosures to clients and prospects are even more important this year in light of new requirements announced last summer.
This is arguably the most important compliance project for the quarter.
Annual Form ADV Review
As you conduct your annual review, I have laid out some reminders based on recent enforcement cases, guidance about the new Regulation Best Interest (Reg BI) requirements and resources to help you address the details. This can serve as your ADV Review checklist.
Although the narrative in Part II of the Form ADV is typically treated as the core of the filing, remember to prioritize Part I and Part III.
• Review Regulatory Expectations
Don’t rely on your memory. Make sure to consult the glossary and frequently asked questions to make sure you understand terms and regulatory expectations. They change over time and it’s important not to guess when it comes to the technical details in Part I of the Form ADV. Also see SEC Instructions.
• Involve the business
Review a draft of the Form ADV filing with the business and document the process, especially private funds disclosures, regulatory assets under management (RAUM) calculations and AUM against marketing claims. If you need support to help prioritize this work, review some of the recent enforcement cases highlighting Form ADV mistakes. Feel free to highlight these cases on your annual training or periodic compliance alerts:
- Exaggerated AUM in Marketing – Bennett and Bennett Group
- False statements regarding AUM not continuously managed and custody rule violations – Clayborne Group
- Failure to file updated form regarding AUM and Form PF – HEP Management
- Fraud and failure to file conflicts of interest disclosures – Northeast Asset Management
- See SEC Risk Alert Form ADV for more
• Start early
Prepare the new Part III – Form Client Relationship Summary (CRS) – before June and review disclosures related to Reg BI and recently announced SEC OCIE Exam Priorities (pages 9-12 regarding seniors, retail and retirement accounts)
- Firms must comply with Reg BI and Form CRS by June 30, 2020. Be prepared for scrutiny of your new disclosures. The regulators have signaled there won’t be a grace period. See Bloomberg Law; JD Supra.
- Remember to check the SEC website for updates. Recently the FAQs were updated to address implementation questions. See SEC FAQs as of Feb; Summary of Further Guidance on Reg BI; Small Firm Resource Guide.
- Remember to update your procedures and work-flow for delivering the new Form CRS. If you are a dual registrant, this applies to brokers and advisers. See FINRA Checklist and Resource Hub.
Consider using a “Disclosure Committee” so there is an efficient process for sign-off before the Form ADV is submitted to the SEC or delivered to clients.
• Collaborate and Document
Create a forum so it is easy to gather feedback on this complex filing. For example, in a cross functional meeting or call, HR and others can more easily contribute for compensation and conflicts disclosures while Finance and others can contribute for disclosures related to valuation and expenses.
• Avoid Mistakes
By collaborating you can avoid inadvertent inflation of calculations in Part 1 and confirm revenue sharing and inaccurate fee and conflicts of interest disclosures in Part II. See Deer Park Road Management case as an example of compliance failures related to fund asset valuation. Also see FAQs Regarding Disclosure of Conflicts Related to Investment Adviser Compensation.
Complete a 360 Cyber review in light of recent guidance and importance of data protection to the resilience of your business.
• Review Vendors and Data
Review vendor sections in Part 1 and make sure your description of cybersecurity, cloud, record retention and other data management oversight is solid.
• Review Ethics
Review the code of ethics description In Part II and consider whether it is prudent to add data ethics as well. Likewise, review your risk disclosures in Part II and consider adding cybersecurity and data protection risks.
• Consolidate Delivery
With so many new privacy laws (GDPR, CCPA), check to see if your privacy policy or privacy practices have changed. If they have, and your company finds itself treating non-public personal information more stringently or differently than is required under Reg S-P, consider delivering your updated privacy policy and Part IIA to your clients at the same time to meet both annual requirements. See SEC 2020 Cybersecurity Guidance for more.
Review ESG and impact claims for consistency and omissions.
• Support ESG Investment Claims
If you have any investment analysis claims about impact, ESG or sustainability investments, confirm they are supported by objective investment methodologies and avoid unsubstantiated claims or claims that conflict with any Corporate Social Responsibility (CSR) or sustainability reports. You can visit the SEC OCIE Exam Priorities to find evolving investment themes on pg. 15. Also see the Columbia Law Review Article if you are interested in the history of disclosures related to environmental claims.
Compliance Takeaways
Keeping current with regulatory changes while also doing your job and running your business is difficult. Existing registered advisors must update and file an amended Form ADV within 90 days of their fiscal year-end – the due date for 2020 is March 30, 2020. The time is now to start thinking and preparing for this important compliance deadline.
It is generally considered a best practice to complete the annual compliance review by the end of the first quarter or early in the second quarter of the year – but not required. Investment advisors should review their compliance policies, code of ethics, and overall compliance program.
Are you taking proper actions to remain compliant? Feel free to reach out if you have any questions.
