Written by Mark Buckley-Jones
Director
Form ADV is the uniform form used by investment advisers to register with both the SEC and state securities authorities. It serves as a comprehensive disclosure document providing essential information about an investment adviser and its business practices, and is required to be filed annually, 90 days after the end of a firm’s fiscal year, with additional intra-year filings also required to reflect material changes as they occur. Despite the significance of Form ADV, we see these filings frequently plagued by common deficiencies and in extreme cases even subject to enforcement action.
With ADV season upon us (for the majority of investment advisers, with a December 31 year end), we will attempt to shed some light on some of these deficiencies, discussing their implications and offering some insight into how they might be addressed.
Incomplete or inaccurate disclosures
Form ADV provides key information about the investment adviser, including its business practices, fees, conflicts of interest and any discipline that it faced in the past. One of the most common deficiencies relates to the submission of incomplete or inaccurate information on the Form ADV, with investment advisers frequently failing to provide all the required details, or inadvertently (to give the benefit of the doubt) providing incorrect information. Form ADV is a publicly available document, and this deficiency undermines the transparency and accuracy that the Form ADV is intended to provide to investors.
Failure to update information timeously
Form ADV must be updated promptly to reflect any material changes in an investment adviser’s business, such as changes in ownership, physical business location, key personnel or business practices. Failure to update information in a timely manner is a common deficiency, compromising the relevance of the disclosed information.
Inconsistencies across parts of Form ADV
Form ADV is divided into multiple parts, each serving a specific purpose. Inconsistencies between different parts of the form are another common deficiency. This can create confusion and make it challenging for regulators and investors to obtain a clear and accurate understanding of an investment adviser’s operations.
Form ADV deficiencies have serious implications for both investment advisers and their clients. The SEC may view these deficiencies as the failure of an investment adviser to meet regulatory standards, and in extreme cases may even take enforcement action
As a recent example, in September 2022 several investment advisers were charged with failure to promptly amend information in their respective Form ADVs concerning the audit of certain private funds.
Six firms were charged with failure to promptly file an amendment to their Form ADV after receiving audit reports for relevant advised funds. This represented a failure to comply with the instructions to Form ADV stating that an adviser that reports that audit reports are “not yet received” must promptly file an amendment to the Form ADV and update responses when the audit reports become available.
A seventh firm was charged with failure to update and amend its Form ADV where it continued to check “yes” where asked if certain of its private funds’ financial statements were subject to annual audit, even though the relevant funds’ financial statements were no longer subject to such audit.
“Registered private fund advisers’ failures to fulfill their reporting obligations make it harder for the SEC to identify firms with possible on-going issues”, said C. Dabney O’Riordan, Chief of the SEC Enforcement Division’s Asset Management Unit at the time the charges were announced. “It is critical for investor protection that private fund advisers update their filings with the SEC as required.”
These cases may serve as a sign that the SEC has ramped up its use of automated tools to screen Form ADVs for particular issues and flag those that merit examination or investigation.
To address and rectify Form ADV deficiencies, investment advisers should adopt a proactive approach. This involves regular monitoring and self-assessment, training of staff on compliance requirements, and the implementation of policies and procedures. Regular reviews (beyond just the annual amendment) of Form ADV filings will help ensure that information remains accurate and up to date.
When creating, updating, and maintaining the Form ADV, it’s imperative to follow the instructions to ensure each section properly discloses all required information. Best practice would be to revisit the instructions each time an annual or other amendment is made to ensure that it is being completed in accordance with the current regulatory requirements.
If you’re not already using a compliance consultant for your ongoing Form ADV needs, please contact us to see how we can best assist you.
