Attention Investment Advisers Registered in Illinois

August 30, 2007

Recently the Illinois Securities Department has been requesting investment advisors registered with their office provide additional information regarding disclosures made in the firm’s Form ADV. Requests for additional information have been made not only during the initial registration process but also in response to updates submitted by registered investment advisors with active registration. Additional information required has included more thorough descriptions of the services and fee arrangements offered by firms, copies of agreements entered into with third-party investment advisors, copies of privacy policy notices, and copies of Schedule H brochures used by the firm even when the wrap-fee program is sponsored by another firm. Firms registered in Illinois should be prepared to provide the additional information and documentation promptly to the Department when requested. We support the Department’s decision to ensure firms are fully disclosing all pertinent information and can substantiate compliance with investment advisory rules and regulations.

Illinois is also providing guidance regarding its interpretation and rules concerning custody. The Department interrupts an investment adviser to have custody of client accounts when question 2.I.(1) of Form ADV Part 1B (deduction of fees directly from client accounts) is checked ‘yes’ even if it is indirect custody, meaning the client has given permission for a third-party investment advisor to deduct fees from the client’s account. When fees are deducted from client accounts, the registered investment advisor will need to also mark Item 9.A and B of Form ADV Part 1A. As long as the firm is marking and complying with Form ADV Part 1B, Items 2.I(1) a, b, and c, the firm does not need to comply with the additional financial requirements, i.e. audited balance sheet and additional net worth and/or bonding. However, firms that deduct advisory fees but do not comply with Items 2.I.(1) a, b, and c (i.e. send invoices to clients, receive client authorization, and ensure the fee deduction is listed on the client’s account statements) will need to comply with the additional financial requirements.

If your firm is registered with the state of Illinois and has questions concerning these requirements, please give us a call.

Posted by Bryan Hill
Labels: Custody, Form ADV