Outside Business Activities – Responsibility to Update Form ADV and Form U4

October 19, 2006

The establishment of sound policies and procedures aimed at monitoring the outside activities of its supervised persons (i.e. the advisor’s officers, directors, partners, investment advisor representatives, and employees) should be part of any firm’s written compliance programs. It is suggested that some type of “outside business activities form” be created and all supervised persons be required to complete the form on an annual basis and whenever changes are needed. Besides the human resources reasons for monitoring outside business activities, there are two important regulatory reasons: (a) Form ADV disclosure purposes, and (b) Form U4 disclosure purposes.

An investment advisor is required to disclose to clients all potential and real conflicts of interests including outside activities of the firm and its related persons. Item 8 of ADV Part II outlines specific business activities or affiliations of the firm’s related persons that must be disclosed. These include affiliations with institutions such as banks, real estate brokers, and broker/dealers. Individuals listed under Item 6 of ADV Part II need to provide detailed business background for the preceding five years. Finally, Item 7 of the Part II requires the firm to provide a description of the outside activity and the amount of time spent on that activity.

In addition to disclosing outside activities on the Form ADV, advisor representatives must disclose their employment history for the previous 10 years and their current outside business activity on the Form U4. It is an advisor representative’s ultimate responsibility to keep the Form U4 current and complete; particularly his/her employment and other business background.

Investment advisors need to be cognizant of the 30 day deadline for making material updates to the Form ADV and Form U4. Whenever an individual or firm’s outside business activities change, those activities need to be updated on the Form ADV and/or Form U4 within 30 days of the change. Moreover, as a best practice, investment advisors should consider requiring its officers, directors, investment advisor representatives and employees to complete an outside business disclosure form on an annual basis. If you have questions regarding these requirements or want to discuss practical applications for the monitoring of outside business activities, please give us a call today.

Posted by Bryan Hill
Labels: Form ADV, Form U4, Outside Business Activities