Form ADV Background Information

Purpose of the Form ADV

The Uniform Application for Investment Adviser Registration (or more commonly known as the Form ADV) is used as the official application document to register as an investment advisor firm. Both the United States Securities and Exchange Commission (SEC) and the state securities regulators require use of the Form ADV as an investment advisor registration document. Once investment advisor registration is granted, the Form ADV must be amended at least annually and whenever material changes occur.

The Form ADV Part II and Schedule F can serve as the required disclosure statement that a registered investment advisor must provide to its clients. Registered investment advisers that use a disclosure statement other than the Form ADV Part II and Schedule F must ensure that the disclosure statement contains the same information as the Form ADV Part II and Schedule F. The Form ADV Part II and Schedule H must be completed by a registered investment advisor serving as the sponsor to a wrap-fee program.

The North American Securities Administrators Association (NASAA) has posted an interactive Form ADV Part II and Schedules (which requires the use of Adobe Acrobat) for use by registered investment advisors. The PDF formatted Form ADV can be viewed through the NASAA website.

What are the different sections of the Form ADV?
A Dissection of the Anatomy of the Form ADV

1. Part 1A. The Form ADV Part 1A identifies the following information about the registered investment advisor applicant: (a) basic contact information such as the investment advisor’s legal and “doing business as” names, the investment advisor contact person’s name, office address and telephone number of the investment advisor, and office hours of the investment advisor; (b) the basis for a new investment advisor’s SEC registration; (c) the states whereby an SEC registered investment advisor will request notice filing; (d) the investment advisor’s organizational form; (e) description of the investment advisory business; (f) the types of investment advisory clients; (g) the investment advisory fee and compensation arrangements; (h) the types of investment advisory activities; (i) the investment advisor’s other business activities; (j) the location of books and records of the investment advisor; (k) financial industry affiliations of the advisor’s related persons; (l) the investment advisor and its related persons' involvement in client transactions such as a proprietary or sales interest or use of discretion; (m) whether the investment advisor maintains custody of an investment advisory client’s assets; and (n) whether the investment advisor or affiliate has been convicted of a felony or investment-related misdemeanor, or subject to an adverse regulatory finding, censure or fine, or a court judgment related to violation of investment-related statute or regulation.
    
   Technical Note: The SEC and state securities regulators have replaced the old Form ADV Part I with the new version known as the Form ADV Part 1. However, these securities regulators have not yet replaced the current Form ADV Part II with the proposed version known as the Form ADV Part 2.
    
   The Form ADV Part 1A also includes several schedules:
    
   1. Schedule A
   • Lists all of the executive officers which must include Chief Compliance Officer, Chief Executive Officer, Chief Operations Officer, Chief Financial Officer and other C-Level associates;
   • and direct owners of the registered investment advisor with a 5% or more ownership interest.
      
   2. Schedule B
   • Lists all of the indirect owners with a 25% or more ownership interest of a direct owner;
      
   3. Schedule D – Lists other miscellaneous information such as:
   • Other business names used by the registered investment advisor;
   • Other office locations;
   • World Wide Web address;
   • Location of books and records;
   • Affiliated registered investment advisors and broker/dealers.
      
   4. Disciplinary Reporting Page (DRP) – Provides details about felony or investment-related misdemeanor, regulatory discipline, or court judgments related to violation of investment-related statutes and regulations by the investment advisor or its affiliated persons. SEC registered investment advisor firms must only report events occurring within the previous 10 years; however, state registered investment advisors must report events for the time period specified in the DRP.

      The Form ADV Part 1A and the above referenced schedules are utilized by both the SEC and state securities regulators.

2. Part 1B. The Form ADV Part 1B requests the following information from a state registered investment advisor applicant:
    
   1. Those states where the investment advisor is applying for registration;
   2. The supervisory and compliance principal;
   3. Information about the surety bond if required by the investment advisor’s home state;
   4. Information about unsatisfied judgment and liens, investment-related arbitrations and civil judicial action; and
   5. Other miscellaneous information.
       
   The Form ADV Part 1B is not utilized or required by the SEC for federally registered investment advisor applicants.
    
3. Part II. The Form ADV Part II is a six page document formatted in check-the-box style. The purpose of the Form ADV Part II is to answer questions relating to the following:
    
   1. Advisory services and fees (including the percentage of advisory billings received from various services offered);
   2. Types of clients;
   3. Types of investments the registered investment advisor offers advice on;
   4. The registered investment advisor’s methods of analysis, sources of information and investment strategies;
   5. Education and business standards required by the firm for those involved in determining or giving investment advice to clients;
   6. Education background after high school and a minimum of five years of business background for executives of the firm and those that provide investment advice;
   7. Other business activities;
   8. Other financial industry activities or affiliations;
   9. Participation or interest in client transactions;
   10. Conditions for managing accounts;
   11. Review of accounts;
   12. Investment or brokerage discretion;
   13. Additional compensation; and
   14. Balance sheet information.
        
4. Schedule F. In many ways the Schedule F is the most important section of the Form ADV. The Schedule F is used as the continuation sheet for the Form ADV Part II and is written as a narrative.

   The length of the Schedule F will vary depending on the needs of the firm. For small, independently owned registered investment advisors, the Schedule F may be no longer than three or four pages. For large, complex registered investment advisors with multiple lines of organization, services, and structures, the Schedule F can grow to fifty-plus pages.

   The Schedule F is used to provide additional information to supplement answers provided on the Form ADV Part II. However, the additional information required on the Schedule F is not always intuitive. While the Form ADV Part II provides specific instructions regarding the items that require additional explanation, regulators expect disclosure regarding items and issues not specifically asked for on the Part II.

5. Schedule G. Schedule G is used when a registered investment advisor is required to provide a balance sheet for its most recently completed fiscal year. However, the majority of registered investment advisors will not need to complete the Schedule G, which must only be completed if the firm requires prepayment of more than $500 in fees per client and six or more months in advance. Further, state registered investment advisor firms that maintain custody (as defined by the respective state) may also be required to complete Schedule G.

6. Schedule H. For registered investment advisors that sponsor a wrap-fee program, the Schedule H becomes a very important document. The Schedule H sets forth the information required to be included in the sponsor’s wrap fee brochure which must be delivered to clients and prospective clients of the wrap fee program.

   Similar to Schedule G, the majority of registered investment advisors do not need to complete a Schedule H. Only sponsors of a wrap fee program must complete the form. A registered investment advisor that participates in another firm’s wrap fee program must provide the sponsor’s Schedule H brochure when soliciting clients into the wrap fee program.

   The key determination to whether an investment advisory program is a wrap fee program or an asset allocation program is how fees are charged to clients. Generally speaking, if investment advisory services and custodial/brokerage services are “wrapped” under one fee, the program can be deemed a wrap fee program. This is opposed to a program where the registered investment advisor charges a set investment advisory fee and the custodial/brokerage fees are billed to the client separately.

   Of course, this is a general description and other factors of a program must be considered before labeling the service a wrap fee program and completing a Schedule H. Another point of distinction that must be made is whether your registered investment advisor is the true sponsor of a wrap fee program or is merely a participant in another registered investment advisor firm’s wrap fee program. Depending on the number of registered investment advisor firms involved in a program and the program’s complexity, it can be hard to determine the true sponsor of the wrap program. But, it is extremely important to know if your registered investment advisor firm does sponsor a wrap fee program in order to complete a Schedule H, if required, and properly explain the wrap program to regulators.

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