What You Need to Know
To our surprise, failure to follow the brochure (aka Form ADV Part 2) delivery rules continues to be one of the most common deficiencies for RIA firms.
A common (and logical) questions we get is “What’s material?” The SEC doesn’t define material, which makes sense since materiality is very much dependent on circumstances. A rule of thumb we use with clients is this: if a knowledgeable client or prospect would expect to be alerted of a change, it’s material. Admittedly, this still leaves a lot open to interpretation (we’ve seen it first hand). Regulators will cast the final vote on this during their next examination, so it usually pays to err on the side of caution.
When material changes do occur, RIAs have the following options:
Option 1: If there have been material changes to your business, they must be described in ADV Part 2, Item 2. Under the current rules, you could provide your clients with a summary of these material changes and an offer to deliver the entire ADV Part 2. In your offer you must include instructions on how clients can obtain a copy from you.
Option 2: Advisors can also opt to deliver a full copy of the entire ADV Part 2. In this instance Item 2 - Material Changes still needs to be updated.
All brochures must be delivered to clients within 120 days of fiscal year end. Electronic delivery will suffice if you are attaching the document to an email. Uploading your ADV to your website and sending a link to clients does not constitute proper delivery. You may lose the ability to show exactly what was delivered to the client.
Why You Should Care
Your brochure informs clients of the details of your firm and any recent material changes that could potentially impact them. You should view your brochure as a publicly-visible sign for your firm, and should be written and updated with this notion of "curb appeal" in mind. Potential and current clients see this brochure as a representation of your firm, and providing them with an up-to-date, accurate brochure signals that you take external communications seriously.
Competitors are reading your firm's brochure as well. A sloppy, outdated, or inaccurate ADV sends a message to competitors that may be damaging when competing for new business.
To ensure that your firm is keeping up with regulatory requirements and industry best practices in this area: