An investment adviser must promptly update its brochure if the information contained in it becomes materially inaccurate. This updated brochure is referred to as an âinterim amendmentâ. Upon updating the brochure to reflect material changes, the investment adviser should begin delivering the interim amendment to its prospective clients before or at the time it advisory contract with such clients. For some material changes, the investment adviser will be further obligated to promptly deliver the interim amendment to its existing clients.
Disciplinary Information
All legal or disciplinary events that are material to a clientâs evaluation of the investment adviserâs business or the integrity of its management must be disclosed. An investment adviser is required to promptly deliver an interim amendment to clients whenever it amends its brochure to add a disciplinary event or to change material information already disclosed in Item 9 of Part 2A (disciplinary information). An interim amendment can be in the form of a document describing the material facts relating to the disciplinary event.
Items 9A, B, and C of Part 2A contain a non-exclusive list of disciplinary events that are presumed to be material if they occurred within the past ten years. However, certain events more than ten years old may need to be disclosed if the event remains material to a clientâs evaluation of the investment adviser and the integrity of its management personnel. Under certain circumstances, an investment adviser may rebut the presumption that a disciplinary event is material. An investment adviser wishing to rebut the presumption that disciplinary event is material should seek the opinion of an attorney or other qualified professional who will consider all of the following factors:
- The proximity of the persons involved in the disciplinary event to the advisory function;
- The nature of the infraction that led to the disciplinary event;
- The severity of the disciplinary sanction; and
- The time elapsed since the date of the disciplinary event.
An investment adviser that concludes that it has overcome the presumption that a disciplinary event is material must prepare and maintain a memorandum explaining its determination and discussing the factors enumerated above.
Disclosure of Other Material Changes
Investment advisers have a fiduciary duty to disclose all material changes to clients even if those changes do not trigger delivery of an interim amendment. While the SEC has explicitly identified certain disciplinary events that are presumed to be material and must be disclosed promptly to clients, the determination as to whether other changes to an investment adviserâs business are material is inherently factual. Accordingly, the SEC expects every investment adviser to determine whether its fiduciary duty to clients require it to promptly disclose changes to information contained in the brochure. In making this determination, the investment adviser will need consider on a case-by-case basis whether the particular facts and circumstances warrant prompt disclosure to clients. Some examples of situations that could constitute a material change are changes in conflicts of interests, fees, financial condition, assets under management, custody, identifying information, form of organization, control persons, and more.
Brochure Supplement
Like the brochure, the Part 2B (âbrochure supplementâ) needs to be promptly updated and delivered in the event of a new disciplinary event or a material change to an existing updated brochure supplement that amends disciplinary information in response to Item 3 of Part 2B must be promptly delivered to existing clients. Amendments may be delivered in the form of a âstickerâ that identifies the information that has become inaccurate and provides the new information. As with the brochure, the investment adviser may have a fiduciary duty to promptly disclose other material changes to clients even if those changes do not trigger delivery of an updated brochure supplement.
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If you need assistance assessing whether a material change requires prompt disclosure to clients, please contact us. MasterCompliance provides expert consulting, outsourcing, and implementation tools in planning and budgeting your firmâs compliance responsibilities.