Will your Form ADV Disclosures Stand Up To Regulatory Scrutiny?

From the end of 2021 and into 2022, we have noticed that the SEC is paying considerable attention to how investment advisors are describing their services on Form ADV, what conflicts may exist and whether disclosed fees are reasonable.

Recent exams have shown that the SEC expects that even the smallest details need to be considered. Advisors are required to act as a fiduciary, and with Regulation Best Interest, upcoming changes to DOL requirements and the current makeup of the SEC, there has been an emphasis on justifying why advisory fees are reasonable.

We would like to share some recent examples regarding conflict disclosures that you should think about:

  • Many custodians have dropped their ticket charges in recent years. In some cases, they’ve dropped to zero. An advisor may be collecting the same fee for the services they offer to their clients while at the same time they are no longer being charged for transactions. Even if there is not a large amount of trading, the SEC expects these changes to be disclosed on the ADV.  If not, it may result in a regulatory finding.
  • Some investment advisors may engage in activities outside the normal scope of their business. Outside business activities should be disclosed to Compliance, monitored, and reported on the individual’s U4. Any conflicts associated with the outside activity should be disclosed on the Form ADV for the clients’ understanding.
  • Advisors have different securities available to them which they can rotate client assets into based on different market conditions. Choosing from these securities requires considerable attention. The securities’ expected rates of return, associated risk and underlying costs should be reviewed. Securities may offer various share classes within their fund families. Each share class may have different underlying costs. Advisors are expected to assess different share classes and choose the lowest cost share class if the client qualifies for that share class. This can, however, occasionally be overlooked. It is important to disclose the different fees and expenses on the Form ADV and to conduct periodic oversight. Doing so could prevent future regulatory findings.

Even though you have your clients’ best interests at heart, it is important to make sure that they understand the nature of your services and associated costs. Regularly reviewing your disclosures can ensure that your clients are well-informed and can keep you out of trouble with regulators. Our consultants understand the nuances in word choice, reporting style and information to include for the ADV. We take the time to get input from you to ensure your disclosures are accurate, do not omit material facts and are reported correctly. Leverage our experience and resources to ensure your ADV meets the regulatory requirements and that the process receives the time this regulatory environment demands.

About The Author

With over 30 years of experience as a financial services professional, Dean Pelos has extensive experience helping firms maintain regulatory compliance, grow sales, and control costs. Dean has a strong background in compliance for investment advisers and broker-dealers and additional experience specializing in regulatory compliance for investment companies.

eBook

Learn how Oyster Solutions creates an efficient, effective compliance program that protects your firm and provides value.

Download