RIA Brochure Delivery Rule: Do I Really Have To Deliver This "Thing" To Clients If I Made No Material Changes Since Last Year?

Thursday, May 02, 2013 12:43
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RIA Brochure Delivery Rule: Do I Really Have To Deliver This
A Registered Investment Adviser’s ADV Part 2A--also called a "brochure"--is one of ithe most critical documents an an advisory firm creates. It's your public disclosure form, the document everyone you work or hope to work with with must see.
 
As securities attorneys, we spend many hours interpreting the SEC’s instructions and tailoring brochures to each RIA's business--your people, products, style, and operations.
 
Here are some insights into the process of creating this important disclosure document, including one that forever quashes the notion that you are not required to deliver your brochure to clients annaully if you have made no material changes to your broichure since you last sent it to a client.

This Website Is For Financial Professionals Only



After about an hour into a meeting an attorney, advisors have a tendency to start calling their brochure, “this
thing.” It's understandable.  Almost all of the 18 or 19 Items covered in the brochure leave something up to interpretation. It becomes a "thing" with a life of its own.

 

Meanwhile, minute details take time and attention to draft, like what constitutes soft dollars, a description of the material risks involved with investing, and disclosures about separate account managers, subadvisory relationships, or unaffiliated wrap programs. 

 

At some point during the process, many advisors seem to  step back ask two questions:

  1. Is anyone actually going to read this thing?
  2. What am I supposed to do with this thing
The first question is relatively simple.  While you would hope that every investment advisory client read your brochure cover to cover, that is not a reality.
 
However, it is safe to assume that any regulator charged with auditing an investment advisory will read “this thing” in its entirety.  Accordingly, it is imperative for this (if no other reason) that the brochure is thorough, clear, and accurate.
 
The second question is also relatively simple, but with a slight twist. Under SEC Rule 204-3, codified at 17 CFR 275.204-3(b)(2), a registered investment advisor is required to deliver a brochure to a client or prospective client before or at the time of entering into an investment advisory agreement.  Moving forward, a registered investment advisor is required to:
 
(2)    Deliver to each client, annually within 120 days after the end of your fiscal year and without charge, if there are material changes in your brochure since your last annual updating amendment:
(i)  A current brochure; or
(ii)  the summary of material changes to the brochure as required by Item 2 of Form ADV, Part 2A that offers to provide your current brochure without charge. (Emphasis added.)
 
This leads to the logical conclusion: an investment advisory firm is not required to deliver a brochure to each of its existing clients unless there has been a material change. However, the instructions for Form ADV Part 2A indicate otherwise:
 
Each year you must (i) deliver, within 120 days of the end of your fiscal year, to each client a free updated brochure that either includes a summary of material changes or is accompanied by a summary of material changes, or (ii) deliver to each client a summary of material changes that includes an offer to provide a copy of the updated brochure and information on how a client may obtain the brochure. See SEC rule 204-3(b) and similar state rules.
 
The term “unless there has been a material change” is demonstrably absent from the instructions. 
 
In light of the above conflict and the SEC’s stated justification for imposing what is commonly called the “Brochure Delivery Rule,” it is clear that RIAs must deliver (or offer to deliver) an updated brochure to its existing clients within 120 days of fiscal year end-–even if there have been no material changes.

Comments (2)

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chuckl404
I'm not so sure it is clear - has this been tested? Has anyone received a notice from the SEC for failure to deliver or offer to deliver a brochure when there have been no material changes? Finally, the "offer" appears to apply solely when delivering a summary of material changes - if there are no material changes, what kind of summary is there?
chuckl404 , November 15, 2013
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Chris Winn
The theory has certainly been tested, even in the naming of the heading in Q&A's and related release documents. The language has changed to the "Delivery Rule" not the "ADV Offer". In SEC speeches they have cited a common deficiency as failure to deliver the ADV to clients annually.

So to take the legal language out, here's what is required.

Start of Relationship >> ADV2A ("Disclosure Brochure") and the ADV2B ("Brochure Supplements") for each advisory person servicing the client must be delivered to the prospective client at least 48 hours prior to entering into the agreement or the client has 5 days to basically back out of your services without penalty or cost.

After the initial delivery, the Advisor is required to EITHER 1) deliver the ADV2A and 2B to this (and every) client at least annually within 120 days following year end (some states have varying rules) or 2) deliver a summary of material changes to this and every client in this timeframe along with an offer to deliver, at no cost, the ADV2A.

Now what constitutes delivery vs. an "offer"? You cannot send a link to clients to direct them to the SEC website or your website. That is considered an "offer" not delivery. The reason is that the advisor could change the content the client would see when clicking that link. If you are delivering electronically, you must use a universal format, such as PDF and attach to the email (or technically you could paste inline, but that would not be well formatted). If you have clients that you must deliver via regular mail, it may be best to use the delivery letter with the offer of the full ADV upon request to reduce costs and effort on production.

Lastly, when does an Advisor need to deliver a change during the year? The same process above would apply any time there is a material change during the year. Consult with your compliance partners of what is deemed material. It is a very gray area, but generally ask yourself, "Would me clients need to know this information?" Any material changes (or the entire disclosure brochure) must be filed via the IARD system and sent to clients within 30 days of the item that required the change.
Chris Winn , November 15, 2013

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