Filling in the gaps on Form ADV

What sections of Form ADV are troubling GPs the most? Compliance experts Monica Bullard and Eric Gelb provide their unique observations.  

The annual updating amendment of Form ADV can be a rigorous and timely matter. That’s why an early start and an organized process can make all the difference. But even after the GP gathers all the required data from its accounting and finance departments, fund administrators and attorneys, some still miss (or misinterpret) a few important sections:   

Frequently missing information from Part 1: 

· Item 1.J., or the CCO’s contact information.

· Item 1.L., or the books and records storage information. Don’t forget about “offsite” service providers including proxy voting services and/or email service providers that may store records on behalf of the firm.

· Item 1.O.. This is talking about assets of the firm (balance sheet assets), not assets under management.

· Item 2.A.. Failing to consider total RAUM when considering Form ADV filing requirements.

· Item 2.B.. A mistake we sometimes see is a GP erroneously determining they are an “Exempt Reporting Adviser.”

· Item 6, or “Other Business Activities”. A mistake here can be failing to disclose all the other business activities you may be actively engaged in. The SEC is particularly focused on activities that create conflicts of interest. If the adviser engages in other “enterprises” or “lines of business” using a name that is different from the names reported in Items 1.A. or 1.B., the adviser is required to complete Section 6.A. of Schedule D.

· Item 8, or “Participation or Interest in Client Transactions”. This section questions the registrant’s participation and interest in their clients’ transactions. Examples include whether the adviser (or a related person) buys securities from advisory clients or sells securities the adviser owns to their advisory clients (principal transactions); and whether the adviser (or a related person) buys or sells for themselves securities (other than mutual funds) that they also recommend to advisory clients.

· Item 9, or custody. Many advisers do not adequately determine whether they or a related person have custody of client assets. Custody is defined fairly broadly to include: (1) possession of client funds or securities; (2) arrangements authorizing the adviser to withdraw client funds or securities (including deducting fees); and (3) legal capacities (such as being a general partner of a limited partnership, the managing member of a limited liability company, the trustee of a trust or the executor of an estate) ownership or access to client funds or securities. Advisers that have custody only because they deduct fees may answer “No” to Item 9.A.(1)(a) and (b). If you respond “yes” to Items 9.A. and/or B. then you must respond to Item 9.C. and the appropriate Items on Section C of Schedule D.

· Item 9.F.. Remember that if you direct debit fees, technically you do have custody and must respond to this question (9.A. is this only question you can respond to with a “no” if you have custody solely as a result of directly deducting fees from the custodian).

Reminders for Schedule D: 

· Section 1.L., or “Location of Books and Records.” The mistake here can be failing to list all of the locations where the adviser maintains its books and records.

· Section 5.G.3.. Be sure to list all investment companies that the adviser not only advises but also sub-advises.

· Section 6.A.. If the adviser conducts business using a name that is different from that listed in Part 1.A. or 1.B., such businesses and names must be disclosed in this Section (6.A.).

Frequently missing information from Part 2: 

· Item 4.B.. If you provide investment advice only with respect to limited types of investments, be sure to disclose this.

· Item 5.B.. Be sure to disclose if you directly debit fees, bill clients and/or let clients select their payment method.

· Item 13.C.. Don’t forget to indicate if your reports to clients are written.

· Item 15. As mentioned above, remember that the ability to directly debit fees deems you to have custody.

Reminders for Part 2B: 

· Remember each supervised person should have a separate and distinct supplement that addresses the six (6) required items.

· Item 2. Be sure to identify the specific positions held by each person.

· Item 6. Be sure to include who and how a client is to call if he has an issue with this IAR.

Before submitting Form ADV to the SEC, consider taking time for the following: 

· Review for necessary updates as a result of changes in the business or regulations.

· Compare Parts 1 and 2A for consistency and completeness.

· Review all materials, including website(s), simultaneously to make sure all of the required information is presented and in a consistent fashion.

· Lastly, find a quiet place to do a final front-to-back review, and ask a colleague to review your forms to ensure accuracy and completeness. A second set of eyes can be helpful to pick up errors and omissions.

Monica Bullard is a managing member at Focus 1 Associates, a compliance consultancy group. Eric Gelb is a director of business development at O’Connor Davies, a professional services firm.