Disciplinary History Disclosures

July 29, 2005

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The SEC and state regulators require registered investment advisor firms to disclose disciplinary history on the Form ADV. Specifically Item 11 on the Form ADV Part I requires certain criminal, regulatory, and civil proceedings to be disclosed. SEC advisor firms may limit their disclosure of any event to ten years following the date of the event’s resolution. Depending on the question, state registered firms must disclose events that took place longer than ten years ago. Item 11 not only requires the disclosure of settled events, but it also requires events that are currently on-going to be disclosed. State registered firms are held to an even higher standard of disclosure as they are required to disclose certain financial (such as judgments and liens), arbitration and additional civil proceedings.

In some cases, disclosure of certain financial and disciplinary history may also need to be provided directly to advisory clients. The parameters of these disclosures are set out under Rule 206(4)-4 of the Investment Advisers Act of 1940. Basically, the intent of the SEC is to require advisors to disclose financial and disciplinary history that may materially affect a client’s decision to contract with the advisor. In lieu of providing a stand alone disclosure document, most advisor firms choose to disclose these events in the firm’s Disclosure Brochure or Form ADV Part II.

Many registered investment advisor firms overlook the fact that not only does the firm’s financial and disciplinary history need to be disclosed, but so does the disciplinary history of all advisory affiliates. According to the SEC advisory affiliates include officers, partners, directors, and employees (not including clerical, administrative or support employees). The definition also includes other persons/firms that control or are controlled by the advisor firm.

Disclosure events are considered material updates and therefore the Form ADV must be updated promptly (usually within 30 days of the event). Does your registered investment advisor firm’s ADV accurately report all disclosure events? Do you have proper procedures in place to ensure the ADV is updated promptly? If you have any questions on what events should be reported on the ADV, please give us a call.

Posted by Bryan Hill
Labels: Form ADV