Under rule 17a-14 under the Securities Exchange Act of 1934 and rule 204-5 under the Investment Advisers Act of 1940, broker-dealers registered under section 15 of the Exchange Act and investment advisers registered under section 203 of the Advisers Act are required to deliver to retail investors a relationship summary disclosing certain information about the firm.
This relation ship summary, or Part 3 of the Form ADV, is a written disclosure that provides a retail investor with succinct information about the relationships and services the firm offers to retail investors, fees and costs that retail investors will pay, specified conflicts of interest and standards of conduct, and disciplinary history, among other things. The relationship summary must be written in plain English, be concise, and provide certain meaningful and accurate information about the firm, its financial professionals and the services it offers retail investor clients and customers.
Format of Part 3
The relationship summary must include the required items enumerated below. The items require you to provide specific information. Form ADV Part 3 items:
- Relationships and Services
- Fees, Costs, Conflicts, and Standard of Conduct
- Disciplinary History
- Additional Information
You must respond to each item and must provide responses in the same order as the items appear in the instructions. Also, you may not include disclosure in the relationship summary other than disclosure that is required or permitted by these Instructions and the applicable item.
Advisers must make a copy of the relationship summary available upon request without charge. In paper format, the relationship summary must not exceed two pages. For dual registrants that include their brokerage services and investment advisory services in one relationship summary, it must not exceed four pages in paper format. Dual registrants and affiliates that prepare separate relationship summaries are limited to two pages for each relationship summary. You must use reasonable paper size, font size, and margins. If delivered electronically, the relationship summary must not exceed the equivalent of two pages or four pages in paper format, as applicable.
Must be written in plain English. For guidance on writing in plain English, check out the SEC’s s “A Plain English Handbook: How to Create Clear SEC Disclosure Documents”.
A firm’s relationship summary should inform the reader about:
- The types of services a firm offers.
- The fees and costs you will have to pay for those services.
- Conflicts of interest a broker or adviser has
- The required standard of conduct associated with the services a firm offers
- Whether a firm and its financial professionals have reportable legal or disciplinary history
- Key questions (conversation starters) to ask your financial professional
- Links or other reference to more detailed information
The SEC notes that each firm’s relationship summary will have similarly worded headings and cover generally the same topics in the same order to make it easy for people to compare firms.
When Are Advisers Required to Update Their Form ADV?
Annual Updating Amendment
Both SEC and state registered advisers must amend their Form ADV each year by filing an annual updating amendment within 90 days after the end of their fiscal year. When an adviser submits their annual updating amendment, they must update their responses to all items in Parts 1 and 2 as applicable, including corresponding sections of Schedules A, B, C, and D and all sections of Schedule R for each relying adviser. Investment advisers must submit their summary of material changes required by Item 2 of Part 2A either in the brochure (cover page or the page immediately thereafter) or as an exhibit to their brochure. Advisers may, but are not required, to submit amended versions of the relationship summary required by Part 3 as part of their annual updating amendment.
Investment advisers registered with the SEC or a state securities authority must amend Part 1A, 1B, 2A and 2B (as applicable) of their Form ADV, including corresponding sections of Schedules A, B, C, D, and R, by filing additional amendments (other-than-annual amendments) promptly, if
- They are adding or removing a relying adviser as part of their umbrella registration;
- Information provided in response to Items 1 (except 1.O. and Section 1.F. of Schedule D), 3, 9 (except 9.A.(2), 9.B.(2), 9.E., and 9.F.), or 11 of Part 1A or Items 1, 2.A. through 2.F., or 2.I. of Part 1B or Sections 1 or 3 of Schedule R becomes inaccurate in any way;
- Information provided in response to Items 4, 8, or 10 of Part 1A, or Item 2.G. of Part 1B, or Section 10 of Schedule R becomes materially inaccurate; or
- Information provided in the brochure becomes materially inaccurate.
Who Is Subject to the Requirements of Part 3?
The requirements in Part 3 apply to all investment advisers registered or applying for registration with the SEC. The requirements do not apply to exempt reporting advisers or any advisers that do not have any retail investors.
For more information on Form ADV, check out our other blogs on the topic:
- Form ADV
- Part 2A of Form ADV: Firm Brochure
- Brochure Delivery Requirements
- And more being posted to our blog page soon.
MasterCompliance provides expert consulting, outsourcing, and implementation tools in planning and budgeting your firm’s compliance responsibilities. If there are any areas where you would like to explore additional assistance or services, please contact us.