Now that you’ve seen what ACA Insight has to offer, don’t be without it. Subscribe now!

The weekly news source for investment management legal and compliance professionals

Current subscribers - please log in to the website in the upper right-hand corner

News March 16, 2015 Issue

More Answers to the Most Common Form ADV Questions

Last week, ACA Insight provided answers to Form ADV questions that advisers frequently find bothersome. Below we provide answers to more. Use the answers to make sure you complete your Form ADV accurately and completely.

Part 1A, Item 8 and 9

Item 8.G(1) – Do you or any related person receive research or other products or services other than execution from a broker-dealer or a third party ("soft dollar benefits") in connection with client securities transactions? Advisers may receive research or other soft dollar benefits, even without a formalized soft dollar arrangement, ACA Compliance Group senior principal consultant Rhea Shelton said. Advisers may also receive research from broker-dealers that execute client securities transactions, but not use soft dollars to receive research produced by third parties. In such instances, advisers should still respond "yes" to this question, he said.

  • Item 9.A – Do you have custody of any advisory clients? Private fund advisers who utilize only a related person entity as a general partner to the fund(s) should still indicate that they have custody of client assets here. Item 9.A(1) should be checked "yes," while item 9.A(2) should show "0" for the dollar amount and total number of clients. "Put the actual dollar amounts in item 9.B," Shelton said.
  • Item 9.F – If you or your related persons have custody of client funds or securities, how many persons, including, but not limited to, you and your related persons, act as qualified custodians for your clients in connection with advisory services you provide to clients? "Even an adviser with custody only as a result of its ability to directly debit fees should list all qualified custodians utilized in connection with advisory services they provide to clients," Shelton said. Private fund advisers need to be aware that the number of qualified custodians disclosed in this item should not be less than the number of custodians disclosed in Section 7.B(1)(25) of Schedule D.
  • Part 1A, Item 10, 11 and 12

    Item 10.A – Does any person not named in Item 1.A or Schedules A, B or C, directly or indirectly, control your management or policies? Don’t mark "yes" for your officers, partners or directors who are already listed in Schedule A or B, said Shelton. "That is not what this question is getting at. It wants persons not already listed in Item 1 or Schedules A, B or C."
  • Item 11.A-H – Disclosure information. Although a question may start with "Have you ever …," an SEC-registered adviser does not have to disclose an event that occurred more than 10 years ago, Shelton said. This is not true for state-registered advisers, who must respond to the question as posed. It should also be noted that advisers may still have a continuing anti-fraud obligation to disclose information about events that occurred more than 10 years ago to clients and prospective clients, even if that event is not reported in Item 11. Separately, be aware that arbitration claims are not required to be reported here, except for state-registered advisers filing Form ADV Part 1B. Such advisers are required by state law to report arbitration claims and complete a corresponding disclosure reporting page.
  • Item 12.A-C – Small businesses. This question applies only to SEC-registered advisers who manage less than $25 million.
  • Schedule questions

    Schedule A – Direct owners and executive officers. Foreign nationals who do not have a Social Security or CRD number may have one assigned to them. The adviser must call FINRA’s Gateway call center at (240) 386-4848 to have one established. "If a foreign entity needs to be disclosed and does not have an IRS tax number or employer ID number, then the adviser may type ‘foreign entity’ in the box and select the employer ID number as the type of information," Shelton said. Trusts should use their IRS tax number as their identification number. If the tax number is the same as the grantor’s Social Security number, then the adviser may select the Social Security number button, and the full number will be blocked from being displayed in the Form ADV public filing. Separately, be advised that Schedule A should report the maximum ownership of each individual or entity listed. It is therefore possible for the ownership percentages to add up to more than 100 percent, Shelton said. Both the trust and trustees must be listed in Schedule A and each trustee should list the full ownership code of the overall trust as his or her ownership percentage.
  • Schedule B – Indirect owners. Each person that owns 25 percent or more of a direct owner listed on Schedule A should be included here. In addition, you should continue to climb the corporate ladder and disclose all persons owning 25 percent or more of any entities listed in Schedule B, as well. "You may stop once you reach a public company," Shelton said.
  • Part 2A

    Item 5 – Fees and compensation. "Private fund expenses are a common focus area on SEC exams," said ACA Compliance Group consultant Hanh Nguyen. "The fund governing documents may use broad language where SEC examiners would expect more explicit disclosures in Form ADV."
  • Item 10 – Other financial industry activities and affiliations. "Part 2A offers a good opportunity to disclose conflicts of interest," Nguyen said. "If a conflict does not fit well in another category, many advisers use this section as a catch-all for their remaining conflict-of-interest disclosures."
  • Item 17 – Voting client securities. While it is true that Form ADV Part 2A disclosure instructions relate to proxy voting, advisers, as a best practice, may want to consider disclosing their class action procedures here, as well.
  • Item 18 – Financial information. SEC-registered advisers that require more than $1,200 in fees per client for six or more months in advance must include a balance sheet for their most recent fiscal year within Part 2A. State-registered advisers must disclose their balance sheet if they charge more than $500 per client for six or more months in advance.
  • Part 2B

    Item 1 – Cover page. Part 2B is required for any employee who provided investment advice for a client and has direct client contact, as well as for any employee who has discretionary authority over a client’s assets, even in cases where he or she had no direct client contact. Depending on the amount of investment discretion given to a junior portfolio manager, research analyst or trader, these individuals may not be deemed to have discretionary authority and therefore may not be required to complete Part 2B. "Don’t forget that each employee must have his or her own Part 2B," said Nguyen. "You may not combine disclosures for several employees within a single Part 2B."

 

  • Item 2 – Educational background and business
    experience.
    Employees with professional designations must provide an explanation of the minimum qualifications required for each designation sufficient for clients to understand the value of the designation.