March 30 is the deadline for registered investment advisory (“RIA”) firms to file Form ADV annual updating amendments. RIAs should meticulously review their Form ADV Parts 1 and 2 to ensure that all information is accurate, consistent and complete. Executives, including CCOs, who have intentionally or inadvertently misstated or failed to disclose material information on their Form ADV have been personally fined and/or barred from the financial industry.
Recent SEC sanctions against firms for Form ADV errors include:
- Consulting Services Group (“CSG”) was fined $150,000 when it failed to disclose in its Form ADV Part II and 2A a 2009 $50,000 personal loan between its then CEO and a New York-based third-party investment adviser that CSG had recommended to certain of its public pension and other clients. This was a conflict of interest that should have been disclosed.
- Arete Ltd, which was doing business as Sky Peak Capital Management, for falsely claiming that it was based in Wyoming when it operated from California. The firm also failed to disclose a complaint filed by Colorado regulators against it and its chief compliance officer for improper use of investments in a private-equity fund. The SEC barred the CCO from the financial industry.
- Ariston Wealth Management, L.P. was charged for misstating its AUM on two different occasions. The commission required the president, CCO and vice president to complete 30 hours of compliance training. In addition, the president was fined $25,000 and the CCO and Vice President were ordered to pay fines of $10,000 each. The firm no longer operates as an advisory business.
These helpful hints may help you avoid inconsistencies and potential enforcement proceedings:
- The SEC has been increasing its expectations regarding fee transparency such that the existence of side letters agreements, fee caps, fee discounts and other arrangements should be disclosed in ADV Part 2.
- Consider any related or affiliated entities or relationships that could create a potential conflict of interest for the advisor. When in doubt, err on the side of disclosure.
- Have there been any changes to the funds service providers such as the custodian, fund administrator, or third party marketer? This information must be updated on Schedule D.
- Are any employees working remotely? These locations must be disclosed on ADV Part 1.
Are you properly calculating the advisor’s regulatory AUM? If you provide continuous and regularly supervisory or management services for an account, those funds should be included in the AUM. You may provide continuous and regularly supervisory or management services for an account, if you:
- Have discretionary authority to allocate client assets among various mutual funds.
- Do not have discretionary authority, but provide the same allocation services, and satisfy the criteria set forth in Instruction 5.b.(3).
- Allocate assets among other managers (a “manager of managers”), but only if you have discretionary authority to hire and fire managers and reallocate assets among them.
As demonstrated by the Arete and Ariston Wealth Management cases discussed above, CCOs are being held accountable for ensuring the accuracy of the firm’s form ADV. Many CCOs in small and mid-size firms perform multiple job functions and compliance may not be their area of expertise.
If you and your CCO would like some peace of mind that your Form ADV is entirely accurate and correct, contact ICSGroup, LLC for help. As NAIC’s Compliance Partner we’re here to help you avoid regulatory blemishes.