SEC Legal News: Form ADV

By Michael Williford, Fall 2016 Student Intern

Rules promulgated under the Investment Adviser Act of 1940 include a requirement that investment advisers deliver to each client or prospective client something called a Form ADV. The part of the form often referred to as the “Brochure Rule,” contains some basic information the law requires investment advisers to disclose before or at the time the adviser enters into an investment adviser contract with a client. The Brochure Rule compels an adviser to disclose to clients information about potential conflicts of interest, even if the adviser believes the conflicts will not affect the advice the adviser provides to clients. The rule also requires advisers to disclose information about how the adviser is compensated.

We all know the joke about the government— “there’s a form for that.” But, the form ADV is a powerful tool investors can use to assess an adviser with whom they may consider doing business. The Securities and Exchange Commission adopted some changes to the form last month that are worth pointing out. The changes to the form are designed to increase the quality of the information available to customers by increasing the degree of transparency in the information required.

Perhaps most important are some changes to the requirements about information the adviser must retain to substantiate claims about the performance of an account the adviser manages. For example, previously, if a brochure or email advertisement claimed a fund generated 20% returns, the brochure or a copy of the email was only required to be kept if the information was distributed to ten or more people outside the investment adviser or its employees. Further, only certain categories of communications were required to be kept. The ten-person limit has been removed, and the rule has been expanded to include any and all forms of communication that make claims about account performance. Combined with the rule’s existing requirement that forces advisers to retain the underlying documentation that supports a claim about performance, the recent changes give investors more information to assess whether an adviser is honest, competent, and worth their business.

The amount of information available can seem overwhelming at times, but Form ADV is an excellent source of basic information that can and should inform an investor’s decision about whether a particular adviser is worth their hard earned dollars. The complete rule changes can be found here.