Form ADV and the Brochure Rule
While broker-dealers have trade confirmations and prospectus delivery, investment advisers have their own primary disclosure vehicle: Form ADV. The Brochure Rule (SEC Rule 204-3) requires advisers to deliver specific disclosure documents to their clients before or at the start of the advisory relationship.
Form ADV Overview
Form ADV is the uniform registration form used by investment advisers to register with the SEC and/or state securities authorities. It is filed electronically through the Investment Adviser Registration Depository (IARD) system.
The Three Parts of Form ADV
| Part | Name | Purpose | Delivered to Clients? |
|---|---|---|---|
| Part 1 | Firm Information | Checkbox/fill-in-the-blank registration data filed with regulators | No - regulatory filing only |
| Part 2A | Firm Brochure | Narrative disclosure document about the firm | Yes - delivered to clients |
| Part 2B | Brochure Supplement | Disclosure about specific supervised persons who provide advice to the client | Yes - delivered to clients |
Form ADV Part 2A - The Firm Brochure
Part 2A must be written in plain English (narrative format, not legalese). Advisers must respond to items in order, using the same headings provided by the form.
Required Items
SEC-registered advisers must include 18 items; state-registered advisers must include 19 items (the additional Item 19 applies only to state-registered advisers).
| Item | Topic | Key Disclosures |
|---|---|---|
| 1 | Cover Page | Firm name, address, phone, website, date, SEC disclaimer |
| 2 | Material Changes | Summary of material changes since last annual update |
| 3 | Table of Contents | Navigational aid using standard headings |
| 4 | Advisory Business | Services offered, specializations, assets under management (AUM) (discretionary and non-discretionary) |
| 5 | Fees and Compensation | Fee schedule, billing method, negotiability, other costs |
| 6 | Performance-Based Fees | Disclosure of performance fees and side-by-side management conflicts |
| 7 | Types of Clients | Client types served, minimum account size/AUM requirements |
| 8 | Methods of Analysis, Strategies, and Risk of Loss | Analysis methods, strategies, and material risks |
| 9 | Disciplinary Information | Criminal, civil, SEC, and self-regulatory organization (SRO) proceedings |
| 10 | Other Financial Industry Activities and Affiliations | Broker-dealer (BD) registration, material relationships creating conflicts |
| 11 | Code of Ethics and Personal Trading | SEC Rule 204A-1 code of ethics, interest in client transactions |
| 12 | Brokerage Practices | Broker-dealer selection, soft dollars, directed brokerage |
| 13 | Review of Accounts | Frequency of reviews, triggers, and client reporting |
| 14 | Client Referrals and Other Compensation | Third-party economic benefits and conflict disclosure |
| 15 | Custody | Custody procedures, account statement delivery |
| 16 | Investment Discretion | Discretionary authority, procedures for granting/limiting |
| 17 | Voting Client Securities | Proxy voting policies, client opt-out procedures |
| 18 | Financial Information | Balance sheet (required if adviser collects $1,200+ in prepaid fees, 6+ months in advance) |
| 19 | Requirements for State-Registered Advisers | Principal officers, outside business activities, additional fees, disciplinary info (state-registered only) |
Exam Tip: Gotchas
Item 18 (Financial Information) requires a balance sheet only if the adviser collects prepaid fees of more than $1,200 per client, 6 or more months in advance. This specific threshold ($1,200/6 months) is frequently tested.
Form ADV Part 2B - The Brochure Supplement
Part 2B provides information about the specific supervised persons who provide investment advice to the client.
Who Needs a Brochure Supplement?
A supplement must be prepared for any supervised person who:
- Formulates investment advice for the client AND has direct client contact, OR
- Has discretionary authority over the client's assets (even without direct contact)
The 7 Required Items
| Item | Topic |
|---|---|
| 1 | Cover Page - Supervised person's name, firm name, contact info, date |
| 2 | Educational Background and Business Experience - Post-secondary education, business positions for past 5 years, professional designations |
| 3 | Disciplinary Information - Material disciplinary events (10-year lookback) |
| 4 | Other Business Activities - Outside business activities and conflicts |
| 5 | Additional Compensation - Economic benefits from non-clients (bonuses, prizes, awards) |
| 6 | Supervision - How the supervised person is monitored; supervisor name and contact |
| 7 | Requirements for State-Registered Advisers - Bankruptcy filings and additional disciplinary items |
Team Exception
If a client's advice is provided by a team of more than 5 supervised persons, the adviser need only deliver brochure supplements for the 5 persons with the most significant day-to-day responsibility for that client's advice.
Brochure Delivery Requirements
SEC Rule 204-3 establishes when advisers must deliver their brochures to clients.
| Obligation | Timing | Details |
|---|---|---|
| Initial delivery | Before or at the time of entering into an advisory contract | Current Part 2A brochure to each new client |
| Brochure supplement (Part 2B) | Before or at the time a supervised person begins providing advice | For each applicable supervised person |
| Annual update/offer | Within 120 days of the end of the adviser's fiscal year | Either: (1) deliver updated brochure with summary of material changes, OR (2) deliver summary of material changes with an offer to provide the full brochure |
| Interim amendment - disciplinary events | Promptly after amendment | If Item 9 (Part 2A) or Item 3 (Part 2B) is amended for disciplinary information, deliver updated brochure/supplement to all clients |
Old Rule vs. Current Rule
| Feature | Old Rule (pre-2010) | Current Rule |
|---|---|---|
| Initial delivery | At least 48 hours before entering the advisory contract | Before or at the time of entering the contract |
| Alternative | Deliver at contracting if client could terminate without penalty within 5 business days | No alternative needed - simplified to one standard |
Additional Delivery Rules
- The adviser may deliver different brochures to different clients if the adviser provides substantially different advisory services
- Each brochure need only include information relevant to that client's services and fees
Exception to Brochure Delivery
No brochure delivery is required for clients who receive only impersonal investment advice (advice not tailored to the individual client's circumstances, such as a newsletter or published report).
Exam Tip: Gotchas
The old "48-hour rule" was replaced in 2010. The current rule requires delivery "before or at the time" of entering into the advisory contract. Many study materials still reference both rules, so know which is current. Also remember: the annual filing deadline (90 days) and the annual delivery deadline (120 days) are different.
Annual Updating Requirement
Investment advisers must keep their Form ADV current through two mechanisms:
| Deadline | Action | Rule |
|---|---|---|
| 90 days after fiscal year-end | File amended Form ADV with SEC/state | SEC Rule 204-1 |
| 120 days after fiscal year-end | Deliver updated brochure or summary of material changes to clients | SEC Rule 204-3 |
- Amendments must also be filed promptly whenever information becomes materially inaccurate (other-than-annual amendments)
- The 90-day filing deadline and 120-day delivery deadline are distinct obligations
Wrap Fee Program Brochure
If an adviser sponsors a wrap fee program (a bundled program where clients pay a single fee for advisory services, brokerage execution, and custody), it must deliver a wrap fee program brochure (Form ADV Part 2A, Appendix 1) instead of the standard Part 2A brochure.
The wrap fee brochure includes all standard Part 2A disclosures plus additional disclosures:
- How the wrap fee is calculated
- The services included in the wrap fee
- Whether the arrangement may cost more or less than purchasing services separately
- Conflicts of interest from the arrangement (e.g., incentive to minimize trading since the adviser bears transaction costs)
Exam Tip: Gotchas
A wrap fee program bundles advisory, brokerage, and custody into one fee. The key conflict to know: the adviser has an incentive to trade less, because trading costs come out of the wrap fee. More trades = lower profit for the adviser. This conflict must be disclosed.