SEC Form ADV is a standard form that investment advisor firms use to register their business and provide information about themselves and business practices to the public. The form contains multiple parts and advisors are required to deliver portions of their form ADV to new or prospective clients.
This article will explain what SEC Form ADV is and how it is used by regulators, investment advisors, and clients of investment advisors.
Definition and Examples of SEC Form ADV
Form ADV is a registration document that investment advisor firms are required to file with either the SEC or the state (or states) in which they are registered. Not all investment advisors are registered with the SEC, but they will all register with a Form ADV. There are differences in the requirements for Form ADV depending on the registration status of the investment advisor.
Investment advisors who oversee more than $110 million are regulated by the SEC, and investment advisors who manage less than $100 million are regulated at the state level. Between those two asset levels, it is possible that an investment advisor may be registered either with the SEC or the state.
In addition to serving as the registration document, Form ADV also provides information about a firm's business to new, prospective, and current clients of the investment advisor. It is meant to provide a clearly written and meaningful description of the firm’s business practices, conflicts of interest, and background information about any employees of the firm who give investment advice.
How Does SEC Form ADV Work?
The form contains three parts, aptly named Part 1, Part 2, and Part 3. Each part provides specific information according to the intended purpose of that particular part.
Part 1 is primarily intended for use by regulators. The SEC relies on the information contained in Part 1 for regulation and examination purposes. However, Form ADV Part 1 filings are available for public view on the Investment Advisor Public Disclosure site.
Part 2 of Form ADV is all about disclosing important information and potential conflicts of interest. It’s also referred to as the “brochure.” Although it is a legal document, it is expressly designed to provide communication to an advisor's clients and must be written in a narrative format with “plain English” that clients can understand. The brochures should be written in short sentences with everyday words rather than legal jargon.
This portion of the form must be delivered to new and prospective clients either before or at the onset of an advisory relationship and must be re-delivered annually to ongoing clients within 120 days of the end of the advisor's fiscal year. If material changes arise at any point then a current brochure or summary of changes must also be delivered.
There are two sub-parts to Form ADV Part 2: Part 2A and Part 2B.
Part 2A contains disclosures about the investment advisory firm. Each area must be completed in order so that each firm's filing is standardized making it easier for clients to compare firms.
There are seven specific disclosure topics in Part 2A.
- Advisory business: This section must describe the nature of the advisor's business to include any specialty it claims, whom it provides services to, which services it provides, and the level of investment assets that the advisor manages.
- Fees and compensation: The advisor must also disclose details of how they collect payment from clients, including a fee schedule and whether fees are negotiable. If there are any additional fees that a client may pay due to their relationship with the advisor, such as brokerage fees and fund expenses, then they must be disclosed as well.
- Performance-based fees and side-by-side management: An advisor must disclose whether they collect performance-based fees, and any conflicts of interest that may exist if they also manage accounts for which they do not charge a performance fee.
- Methods of analysis, investment strategies, and risk of loss: The advisor must explain their process of investment analysis along with the general risks of investing and any risks specific to or inherent in the particular style of the advisor.
- Disciplinary information: This section describes any disciplinary or legal information that would be relevant to a potential client's evaluation of the firm. Some items are required to be included if they happened within the last 10 years.
- Code of ethics, participation or interest in client transactions, and personal trading: Advisors must provide a summary of their code of ethics and describe any situations in which an advisor would have a material financial interest in client transactions, including if the advisor invests in the same securities it recommends to clients.
- Brokerage practices: The factors an advisor considers in choosing a broker-dealer for placing client transactions. This section also includes information about how an advisor addresses conflicts of interest related to soft dollar practices, client referrals, directed brokerages, and trade aggregation.
This section is a supplement that contains information about each individual at the firm that provides investment advice to or makes investment decisions for, clients. Employees who are not directly involved in making investment decisions or providing advice do not need to be included in Part 2B.
There are six sections of Part 2B.
- Educational background and business experience: This section describes the formal education of each individual and their business experience for the last five years.
- Disciplinary information: This section is the same as the corresponding section in Part 2A, but it’s at the individual level instead of for the entire firm.
- Other business activities: If an individual is involved in any outside business activities, those must be disclosed here along with an explanation of any related material conflicts of interest.
- Additional compensation: Any economic benefit an advisor receives from someone other than the client for providing investment advice is described here.
- Supervision: This section describes how the investment advisor supervises the individual, including contact information for that supervisor.
Part 3 to Form ADV is a newer section that was added in 2020. It serves as a relationship summary for retail investors. It includes much of the same types of information contained in Part 2 as well as information about the standard of care the advisor is required to uphold, key questions investors should ask the advisor, and how the clients can find out more about the advisor and their services. This section also requires “plain English” writing.
- SEC Form ADV is the primary document required for registration with securities authorities at both the SEC and various states.
- Form ADV explains basic information and important disclosures to potential and current clients of investment advisors.
- Form ADV is available online, and advisors must regularly deliver the brochure to clients.
- The form is updated annually or sooner if material changes occur.