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

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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.

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