Annual ADV Update: Recent Changes to Note

It’s that time of year again! It’s time for the each firm to complete their Annual ADV Updating Amendment. Experienced firms are probably familiar with this process, while newer firms may be going through this process for the first time. Either way, there are some important changes to Form ADV Part 1, that will most certainly change the process for compliance officers and compliance consultants across the board. Annual updates must be submitted within 90 days of of the firm’s fiscal year end.  Most firms have a fiscal year that ends on December 31st each year, so all amendments are due by March 31st  each year for those firms. Let’s discuss 5  of the more prevalent changes that firms will experience during this year’s annual updating amendment.

1. Change in AUM (Assets Under Management) Reporting - For those who are familiar, traditional AUM reporting involved Calculating your Assets Under Management, and reporting total AUM and separating AUM by discretionary and non-discretionary relationships. In terms of types of clients, traditional reporting involved estimating within a range of percentages the “type of clients” for which the Assets Under Management are attributed. For example, if a firm had roughly 65% of their clients classified as “Individual” clients, reporting this as a range of 50%-75% was sufficient. Those days are over. On the new Form ADV Part 1, the specific number of clients attributable to each client type is required. So, whatever specific number of clients within each client type is the number that needs to be reported on Form ADV Part 1.
   
   In addition to this requirement, the amount of Assets Under Management attributable to each client type is now required as opposed to a percentage estimate within a range. For instance, firms were formerly permitted to report that 50%-75% of their AUM were attributable to individual, or high net worth clients, etc. Now, the exact amount of AUM attributable to each client type must be reported. To further complicate things, the amount of AUM reported by client type must equal the total discretionary and non-discretionary AUM reported in the subsequent section of the form.

2. Additional reporting for separately managed accounts - With the updated Form ADV Part 1, reporting for Separately Managed Accounts has been introduced. Per the SEC release, “For purposes of reporting on Form ADV, we consider advisory accounts other than those that are pooled investment vehicles (i.e., registered investment companies, business development companies and pooled investment vehicles that are not registered, including, but not limited to, private funds) to be separately managed accounts.” It is important for firms to keep this definition in mind as they respond to the questions in item 5 on Form ADV Part 1 regarding separately managed accounts. This line of questioning extends to the nature of the activities that take place, as well as the custodian where assets are held, and the asset allocation mix of assets held in Separately Managed Accounts. Therefore, firms are wise to review these questions prior to beginning the process of running reports for their AUM and client numbers.

3.  Social Media Pages - Another new required disclosure on Form ADV Part 1 is the disclosure of Social Media Pages. Specifically, the question reads “Do you have one or more websites or accounts on publicly available social media platforms, including, but not limited to, Twitter, Facebook and LinkedIn?” When the answer is yes, there is a subsequent section “Section 1.I. of Schedule D.”, where those pages are to be disclosed. So, when running reports, firms should take a moment to take note of their social media page locations for this reporting requirement. One quirk in the FINRA website is that “http” or “https” must be present in the URL in order for the entry to be accepted.
   
   Quite a few firm owners have questioned if their business, and/or personal social media pages are required in this section. Most certainly the business page disclosure is required, but conventional wisdom says that each firm will have to evaluate to what extent they utilize their personal pages for business purposes and be prepared to explain to regulators why they did or did not choose to disclose personal social media pages on the filing.

4. Other Offices - Another question that has been introduced in the most recent Form ADV Part 1 is regarding other offices. Most specifically, the question reads, “What is the total number of offices, other than your principal office and place of business, at which you conduct investment advisory business as of the end of your most recently completed fiscal year?” For the purposes of passing the completeness check and submitting the form, that is the extent of the entry that is requested. However, it is advisable that firms make a written record of exactly what activities are taking place at these other offices, to determine if further action may be necessary. There are times in which a Form BR may need to be completed to disclosure a branch location. Or, there may arise the need to add the address of the additional location in Form ADV Schedule D. Section 1.F Other Offices based on the activities that are taking place in the alternative location. When in doubt, it’s never a bad idea to present the documentation of activities executed at the various office locations to your regulator to get their take on what additional disclosure is required.

5. Solicitation Arrangements and Referrals - There are now a few additional questions regarding solicitation arrangements and referrals. The line of questioning is fairly straightforward, but the important item to remember is to consider both cash, and non-cash compensation, when addressing this item. Most Compliance Officers automatically consider cash compensation, but may negate to consider any non-cash compensation as being a relevant form of payment for referrals.  Also, as you review this section, be mindful that if any of these questions are answered “Yes”, that there is likely additional disclosure required in Form ADV Part 2A Brochure.

Firms should use their resources whenever questions arise about this process. Whenever you come across an unrecognized term, leverage the Form ADV Part 1 Glossary of Terms for guidance, and always be prepared to reach out to regulators for answers that may not be specifically addressed in documentation. It seems a bit burdensome, but once the process is complete, most will find that it’s never as bad as it seemed in the beginning. Good Luck!

About The Author

Scott is a licensed Securities Principal with experience in both RIA and broker-dealer compliance. He began his financial services career in 2006 as a Registered Representative with E*Trade Financial in Alpharetta, GA. He has also worked with J.P. Morgan Private Banking in Chicago, IL and with Wells Fargo Advisors in Chapel Hill, NC.

Scott’s most recent role before joining Team XYPN was as Compliance Officer of Carolinas Investment Consulting, in Charlotte NC. He’s a graduate of The University of North Carolina at Chapel Hill and holds FINRA Series 63, 65, 24, 4 and 53 Licenses.

Scott lives in Charlotte NC with his wife Meredith, and their two Sons Tyson and Jackson. In his free time, Scott enjoys watching sports, exercising, and operating the charitable organization he created upon his father’s passing.