Part 2 of Form ADV is a written disclosure statement required for federal and state investment advisor registration. Form ADV is divided into Part 1 and Part 2. This article discusses Form ADV Part 2. See also our article discussing Form ADV Part 1.
Part 2 is further divided into two subparts. Part 2A is commonly referred to as the Firm Brochure, while Part 2B is referred to as the Firm Supplement. Federal registration requires investment advisor applicants to prepare only a Firm Brochure; while state registrations generally require applicants to prepare both the Firm Brochure and the Firm Supplement.
Firm Brochure (Part 2A)
The Firm Brochure discloses specific information about an investment advisor and must be written in a narrative format and in plain English. It is composed of numerous section headings, in which an investment advisor discloses information including: (1) the advisory services of the firm; (2) fees and compensation that the firm charges for its services; (3) types of clients of the firm; (4) code of ethics and personal trading; (5) brokerage practices; (6) custody of funds and investment discretion; and (7) financial information about the firm. State registrations and investment advisors must also disclose certain state required information in additional sections.
The Firm Brochure is considered a public document that will be published with the Investment Advisor Public Disclosure (the “IAPD”). It also must be provided to clients either prior to or at the time that the client enters into an investment advisory agreement with the investment advisor. Therefore, it must be carefully drafted to conform to the specific requirements of federal and state regulators. Failure to provide proper disclosures and other required information can result in rejection of an investment advisor's application. Additionally, if the Firm Brochure contains false or misleading information, its publication can result in criminal or civil liability against the investment advisor, its owners, and officers. After initial registration, the Firm brochure must be amended annually or at any time that the included information becomes materially inaccurate.
Brochure Supplement (Part 2B)
The brochure supplement is required only for registration with certain states and not the SEC. It requests information in narrative format discussing additional background information about the firm and the individual advisor representatives, as required by the states.
Investment advisor registration requires disclosure in compliance with complex state and federal regulation. An RIA registration applicant should consult an experienced investment attorney to assist it in navigating the intricacies of Form ADV.
