Investment Advisers Disclosing Disciplinary Events on Form ADV Part 3

September 22, 2020

Intended to be a concise and easily understandable disclosure for retail investors, the United States Securities and Exchange Commission (“SEC”) implemented the Form CRS/Form ADV Part 3 relationship summary to help SEC registered investment advisers provide information to their retail investor clients about the relationships and services the investment adviser firm offers, fees and costs that retail investors will pay, specified conflicts of interest and standards of conduct, and disciplinary history.  To learn more about the SEC’s requirements of Form CRS/Form ADV Part 3, please see our website page at https://www.ria-compliance-consultants.com/form-adv-part-3-faqs/ .

However, a recent analysis by the Wall Street Journal has found that as many as 20% of firms currently reporting no disciplinary events on their Form CRS/Form ADV Part 3 have failed to disclose one or more relevant legal or disciplinary events. Given the SEC’s current focus on Form CRS/Form ADV Part 3 compliance, RIA Compliance Consultants strongly encourages SEC registered investment adviser firms to review the Form CRS/Form ADV relationship summary for proper disclosure of disciplinary events, including a review of underlying disclosures made or required to be made in the Form U4 and/or Form ADV Part 2.

In its Risk Alert on Form CRS/Form ADV Part 3 earlier this year, the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) noted that the SEC would begin examining SEC registered investment adviser firms for Form CRS/Form ADV Part 3 compliance after the initial compliance date in June 2020. As a result, SEC registered investment adviser firms are currently eligible for such examinations. If selected for an examination, the investment adviser can expect SEC staff to request and review outside documentation, such as the Form

ADV Part 2 and advisory contracts for consistency with the Form CRS/Form ADV Part 3 and the investment adviser’s actual practices.

If not already in place, investment adviser firms need to implement a robust compliance program designed to ensure t

hat the Form CRS/Form ADV Part 3 relationship summary is updated, filed, and delivered as required on an ongoing basis. In addition, performing in-house compliance testing will be necessary to help the investment adviser firm prepare for an SEC examination and ensure proper compliance with the Form CRS/Form ADV Part 3 requirements.

An investment adviser’s policies and procedures should designate one or more specific individuals to be responsible for each aspect of compliance with the rule, and should ensure that the investment adviser regularly reviews the Form CRS/Form ADV Part 3 for consistency with the firm’s other materials relevant to retail investors, such as disclosure brochures, advisory contracts, and advertisements.  RIA Compliance Consultants has prepared a sample compliance manual section related to an SEC registered investment adviser’s obligation to file, deliver and update the Form ADV Part 3/Form CRS to retail investors; this sample compliance manual section can be purchased at https://www.ria-compliance-consultants.com/product/sample-wsp-coe-section-form-adv-part-3/ . Similarly, the investment adviser should ensure it has procedures in place to confirm that all required disciplinary and legal events for the firm and its investment adviser representatives have been reported to the firm and disclosed on the applicable form(s), such as the Form ADV Part 2 and/or Form U4.

RIA Compliance Consultants has developed a module for Form CRS/Form ADV Part 3 compliance testing in the RIA Express – Compliance Review Tool. This new module takes your investment adviser through a series of questions about its disclosures, policies/procedures and actual practices related to the Form CRS/Form ADV Part 3.  Based upon your investment adviser’s answers and the SEC’s published rules for a federally registered investment adviser, RIA Express – Compliance Review automatically generates a written findings report and allows you to create and track the status of your corrective actions. The RIA Express – Compliance Review Tool is available through one of our Annual Compliance Program Packages.

Contact Us

If your investment adviser firm is an existing client of RIA Compliance Consultants and would like assistance reviewing its disciplinary disclosures, developing customized policies and procedures, and/or implementing compliance testing for the Form CRS/Form ADV Part 3, we encourage you to speak with your compliance consultant. Or, if you are not an existing client of RIA Compliance Consultants, click here to set up an introductory call with our Business Development Team.

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Posted by Grant Parr
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