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What documents must a registered investment advisor in the United States produce for a new individual client, and which documents must the client receive or have access to on an ongoing basis?
Hi! Thanks for asking Wonder to find the document a registered investment advisor in the US must produce for a new client.
The short answer is the client must receive a brochure (Form ADV Part 2A) and a copy of the advisor's privacy policy on an annual basis, or following any material changes. The most useful sources I found on this research were the SEC and RIA Compliance Consultants. Below you will find a deep dive of my findings.
ONGOING ANNUAL REQUIREMENTS
The SEC and similar state rules specify that investors are required to deliver to clients and prospective client a brochure disclosing information about their firm. Investors may also be required to deliver a brochure supplement giving information about one or more of your supervised persons. Form ADV (attached) sets out the minimum disclosure that the brochure (look at Part 2A for firm brochure information and Appendix 1 for a wrap fee program brochure) and brochure supplement (Part 2B) must contain.
Clients must also receive any amendments or updated brochures within 120 days of the end of the advisor's fiscal year. Additionally, material updates or disclosures of events must also be sent to clients "in a timely manner". If there are no 'material changes' to report, then Form ADV Part 2A (Item 4) must still be updated to reflect the amount of assets under management, as well as any other outdated figures on the form.
If you provide substantially different advisory services to different clients, then then different brochures may be produced provided they each provide the relevant services and fees that are applicable to that client. Brochures also do not exempt investment advisors from their usual disclosure obligations.
In addition to producing the brochure(s), an advisor must also have a Form ADV on file with the SEC. Customers seeking a financial advisor are advised to ask to see a copy of a firm's ADV, as this is a form that fully details the firm's compensation and fee charging structures.
The SEC provides a sample version of what a Form ADV Part 2A (the brochure) may look like. State regulators have produced other samples to peruse, and some firms publish theirs online.
In addition to the annual delivery of the brochure (or its material changes summary), an advisor must also deliver to the client a copy of the firm's privacy policy. Both the brochure and privacy policy can be delivered electronically, and the general advice is that the requirement for these is satisfied at the same time.
CONTRACTS
Written client contracts are actually not required, though it is considered best practice to have agreements or advisory contracts in writing. Reporting requirements (books and records rules) do assume that written contracts between advisor and client are kept, and in the case of dispute, written copies will produce the best evidence of an advisor's authority to act on behalf of their client.
- No assignments without client consent – Section 205(a)(2)
- Disclosures of general partnership changes – Section 205(a)(3)
- Restrictions on Performance Fees – Section 205(a)(1)
- Prohibition of Waiver of Compliance – Section 215 (a) & (b)
Most state security laws do require written contracts, so it is important to check local regulations. Further requirements like services to be provided, the term of the contract, the advisory fee (or formula for computing the fee) and the manner for pro-rating pre-paid fees at termination can also be required by state law. Here is a sample contract from Grossman Financial.
OTHER REPORTING OBLIGATIONS
Depending on the size and nature of an investment adviser's business, there are other reporting and disclosure obligations. Here are other instances where reporting becomes necessary:
- Any advisor must disclose any financial conditions that may impair the ability of the advisor to meet the contractual commitments of their clients. (these are often found within Form ADV Part 2A)
- Any legal or disciplinary events that are material to the advisor's integrity must also be disclosed. (these are often found within Form ADV Part 2A)
- Certain advisors exercising investment discretion, or sharing investment discretion with others, over equity securities having a fair market value of at least $100 million (in aggregate) must file and disclose Form 13F on a quarterly basis, detailing the holdings that it manages on its own behalf and on behalf of clients.
CONCLUSION
In conclusion, the vast majority of an investment advisor's document requirements are found within Form ADV Part 2A, which must be delivered to clients on an annual basis, along with a copy of the advisor's privacy policy. There are additional requirements surrounding the reporting of material changes and certain advisors exercising investment discretion of assets over $100 million.
I hope this is helpful. Please feel free to ask Wonder if you have any more questions!