The annual amendment for ADV Parts 1A (and 1B for state-registered advisers) and the Brochure (ADV Part 2A) is due March 30, 2020 (for firms with year-end fiscal years). These must be filed with the SEC and with the State of Louisiana (or other state[s] of registration) through the IARD. There is no annual amendment required for the Brochure Supplement (Part 2B). However, you should amend the Brochure Supplement, as well as the other ADV Sections, when it becomes materially inaccurate (some items in the ADV, such as changes in assets under management, do not require interim amendments).
If there is a material change to your Brochure (ADV Part 2A) from the last annual update, you are required to deliver the updated brochure to your clients within 120 days of the end of your fiscal year-end. You are also required to promptly deliver to your clients an updated Brochure Supplement if there is updated disciplinary information.
Form CRS is a new disclosure form – intended to be a simple, easy-to-read summary regarding the nature of a client’s relationship with the financial professional. Form CRS is part of Form ADV (ADV Part 3). Form CRS is limited to two pages for advisers and four pages for dual registered adviser/brokers. Form CRS presents information about the adviser using standardized headings in a prescribed order with the following items:
- Relationships and Services;
- Fees, Costs, Conflicts, and Standard of Conduct;
- Disciplinary History; and
- Additional Information.
Starting on May 1, 2020, and no later than June 30, 2020, investment advisers (and broker-dealers) will be required to file a Form CRS electronically through the IARD (the CRD for broker-dealers). After June 30, 2020, advisers and brokers will be required to provide retail investors with a copy of Form CRS. The Form CRS must be delivered to each new client or existing client before or at the time: (1) the firm opens a new account, (2) recommends the rollover of an IRA, or (3) recommends or provides a new brokerage or advisory service. In addition, Form CRS must be posted prominently on the firm’s website.
The good news for state-registered advisers, SEC-exempt reporting advisers, and institutional advisers is that they do not have to prepare or file Form CRS. Form CRS is only required for SEC registered advisers who provide services to retail investors – natural persons, or their legal representatives, primarily for personal, family, or household purposes.
We have lots of resources to help you with Form CRS. Please feel free to give a me a call. A good place to start is the SEC website on Form CRS. “Form CRS Relationship Summary; Amendments to Form ADV, A Small Entity Compliance Guide.” Available at https://www.sec.gov/info/smallbus/secg/form-crs-relationship-summary.
SEC 2020 Examination Priorities
On January 7, 2020, the SEC’s Office of Compliance Inspections and Examinations (OCIE) published its “2020 Examination Priorities.” Available at https://www.sec.gov/about/offices/ocie/national-examination-program-priorities-2020.pdf. These priorities generally follow the SEC’s 2019 examination priorities. Relevant for our readers, there remains a strong focus on the protection of retail investors. The SEC stressed the importance of providing investors with accurate disclosures relating to fees and expenses and conflicts of interest, including verifying that fees and expenses are calculated and charged in accordance with these disclosures.
In addition, the SEC will also be assessing whether compliance “programs and their policies and procedures, are reasonably designed, implemented, and maintained.” Other priorities include a focus on dually registered advisers and advisers that utilize third party managers (SMA accounts). A new area, the SEC will be reviewing implementation of Regulation BI and Form CRS. Another new area will be a review of disclosures relating to emerging investment strategies, such as “strategies focused on sustainable and responsible investing, which incorporate environmental, social, and governance (ESG) criteria.”
In terms of choosing firms for examination, the SEC indicated a continuing focus on newly-registered advisers, advisers that have never been examined, and advisers to private funds.
Other SEC examination priorities include:
- “Systematic” or “algorithmic” trading;
- Anti-Money Laundering (AML); and
- Digital assets, i.e., digital currencies.
SEC Statistics on Advisers
In the “2020 Examination Priorities”, the SEC published some interesting statistics. The SEC reports that it supervises 13,475 advisers with AUM of $84 trillion. The SEC also reported that it completed over 3,000 examinations in 2019 (17 percent of all SEC registered advisers). Some other statistics:
- Over 3,700 RIAs each manage more than $1 billion in assets;
- Approximately 36 percent of RIAs manage a private fund;
- Over 60 percent of RIAs are affiliated with other financial industry firms; and
- Approximately, 12 percent of RIAs provide advisory services to a mutual fund, exchange-traded fund, or other registered investment company.
That’s all for now. Please feel free to contact me if you would like more information on any of the above.
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