It's that exciting time of year for many advisers. You're probably thinking tax time, but there's something even more scintillating: the annual filing of Form ADV.
All kidding aside, this yearly ritual may seem tedious, and those who use outside counsel may find it lightens their wallet, but to regulators it's serious business. Advisers should give it the attention it warrants but may not be getting.
Mistakes on Form ADV Parts 1 and 2 are low-hanging fruit for the Securities and Exchange Commission and state regulators. As Todd Cipperman, principal at Cipperman Compliance Services, said in a recent article by InvestmentNews reporter Liz Skinner, “An incomplete or inaccurate Form ADV makes for easy enforcement cases.”
JUST PLAIN LIED
And there were many last year. Fines in the tens of thousands were ordered for infractions that ran the gamut from negligible to outright misrepresentation. Some firms misstated assets under management or had inconsistencies between ADV Parts 1 and 2, while others just plain lied about the state in which they do business. Still others chose not to report complaints against them.
None of these decisions was wise.
But even advisers looking to stay on the up-and-up with regulators may experience difficulties accurately answering the 46 pages of questions in Part 1 and meeting the requirements of Part 2 (for which there are 26 pages of instruction). As the form gets longer, so does the potential for mistakes.
What exactly is your AUM at any given moment? Hard to answer. You might have assets at several custodians and some directly with funds. What about cash or annuities? That's just one area ripe for unintended mistakes.
But regulators don't appear to be gunning for “gotcha” opportunities to strike and boost their coffers.
As long as you attempt to provide all the required information on your business, employees and clients in good faith and ensure any reporting is aligned across disclosures, advisory agreements and advertising, there's no need to lose sleep over an SEC review.
A close eye on disclosures by someone in the know is essential, though. It may be tempting to give the forms a quick glance and assume not much has changed or delegate responsibility to an assistant. But ultimately, the adviser is responsible for the accuracy of what is reported.
Even outsourcing the annual update to compliance experts won't get the adviser in charge off the hook. The experts make mistakes and may be prone to make more because they're less familiar with the day-to-day work of the firm. A second set of eyes from someone who does is critical.
The lessons from last year's enforcement cases are: Don't lie to try to game the system, don't even mischaracterize or attempt to make fuzzy things you're not proud of. They will come out. But if you approach the task with honest intent, what your parents told you growing up probably will suffice: Do the best you can.
After all, if it's hard for you to discover where you're making mistakes, think how difficult it will be for the SEC ... if they ever get around to examining you.