Inconsistency across Form ADV filings, client advisory agreements, and disclosures remain a focus for SEC examinations. Even minor discrepancies can raise questions about compliance oversight and clients’ ability to provide informed consent. Ensuring consistency across these documents is not only a regulatory expectation, but also a critical risk management practice.
Key Risk Areas
The SEC continues to identify discrepancies between Form ADV including Form CRS disclosures, the Firm Brochure, and client advisory agreements. Examiners frequently view these inconsistencies as a breakdown in compliance oversight.
Some common risk areas include:
- Inconsistent or conflicting fee and billing disclosures
- Scope of services
- Conflicts of interest
- Standards of conduct
- Disciplinary and regulatory disclosures
Client Agreements and Form ADV
Client advisory agreements are the most critical document as that binds the relationship between the adviser and client, and sets forth the services, fees, and expectations of both parties. These agreements must be consistent with the disclosures provided in Form ADV, ensuring that what is disclosed to clients aligns and provides them enough information to give informed consent to the terms of the agreement.
Form ADV Parts 1 and 2 serve as the adviser’s primary disclosure brochures and provide material information about the firm’s business, ownership, services, fees, conflicts of interest, practices, and disciplinary reporting history. Read our recent blog post on this here.
Form ADV Part 1 (submitted to the SEC) is the application for advisory services and provides data necessary for regulators to review advisory services and activities and assess regulatory risks inherent with the business.
Form ADV Part 2 (the “Firm Brochure”) is a narrative disclosure document provided to clients that describes the adviser’s services, fee practices, conflicts of interest, and other material information necessary for clients to make informed decisions.
Form ADV Part 3, also known as Form CRS (Client Relationship Summary), is a summary of the Firm Brochure (ADV Part 2) specifically for current or prospective retail investors. It is designed to present key information in plain English, highlighting the nature of the advisory relationship, and other key information.
Best Practices
It is critical that the information in Form ADV Parts 1, 2 and 3, and client advisory agreements remains consistent to avoid regulatory scrutiny as inconsistencies may raise concerns regarding disclosure adequacy and clients’ ability to make informed decisions.
To help ensure your filings and client agreements remain compliant and consistent, consider these key steps in your annual review process.
- Client agreements and Forms ADV disclosures should always remain consistent
- Disclosures should be clear, complete, and aligned with actual practices
- Updates to one document trigger a review of the others – and could necessitate amendments
As you make your Form ADV annual updates this year, be sure to consider updates that may be required for your client advisory agreements. For more information, and for assistance with your ADV filings and client agreement updates, please contact us at 619.298.2880 or email [email protected].
*Form ADV Filing deadline is on March 31 for those with a December 31 fiscal year-end.
