SEC Examination Lessons for Form ADV

March 21, 2025

It is that time of the year again, annual ADV amendment filing season. For firms with a December 31, 2024, fiscal year-end, the ADV is due on March 31, 2025. By now, firms have already funded their E-bill accounts in IARD with the $225 annual fee for Registered Investment Advisers. Chief Compliance Officers have gathered and reviewed the necessary data to support regulatory assets under management (“RAUM”) and information on the firm, employees, clients and investments. As the finishing touches are put on final drafts of Form ADV Part 1, the Part 2A &2B Brochure and Brochure Supplement, and the Part 3 Client Relationship Summary or Form CRS, here are some lessons to consider from recent SEC examinations we have seen.

Accuracy and Omissions

• Consistency Across Part 1, Part 2A & 2B, and Form CRS – Many types of information are disclosed in all three parts of the ADV. A firm’s responses must be consistent.  For example, if you moved principle office locations, make sure that references to the old location have been updated on all three parts. If an employee with disciplinary history leaves the firm, that means that references to that disciplinary history need to be updated throughout the ADV.
• Location of Books and Records – We have seen examiners asking questions around responses in Schedule D Section 1.L around locations of books and records. To the extent a third-party service provider maintains any records for your firm, consider adding them in Section 1.L.
• Compensation and Business Lines – Item 5.E of ADV Part 1 has a list of compensation types, these should agree with the compensation disclosures in Part 2A and Form CRS. Similarly, Item 5.G of ADV Part 1 has a list of advisory activities, these should also match disclosures in the rest of the ADV. If you have added a new business line, such as financial services, and that business line has a different type of compensation, be sure to double-check these references for accuracy.

Marketing

• Item 5.L of Form ADV Part 1 – With the new Marketing Rule came a new section to disclose the use of performance marketing, specific past investment advice, testimonials, endorsements, third-party ratings, hypothetical performance, and predecessor performance. Two years have passed, are these marketing answers still accurate for your current practices?
• Timing of Item 5.L Updates – In the ADV instructions, changes to 5.L are not among those requiring an other-than-annual amendment. However, firms can lose track of current practices and fail to adjust an answer that is no longer accurate. If you have moved away from predecessor performance, change the answer. If you cannot point to an example of hypothetical performance in any of your marketing for the last year, then that response will be scrutinized during an examination. Examiners use these responses to choose examination subjects, so if you say “yes” make sure it is a current marketing activity.
• Third Party Promotion – The SEC has been on the lookout for references to the former Cash Solicitation Rule (Advisers Act Rule 206(4)(-3)). The rule was subsumed into the new Marketing Rule, and any references in your Part 2A to this former rule could earn you a deficiency during your SEC examination.

The Client Relationship Summary – Form CRS

• No Creative Writing – The instructions for Form CRS includes heavily prescriptive language. Do not summarize or paraphrase the specific wording supplied by the SEC, especially the conversation starters. SEC examiners are also paying close attention to the formatting and location of this prescriptive language within the Form CRS.
• Material Changes Need a Third Page – Form CRS was first due in June of 2020. Many firms may not have had any material changes since then and are still using this same form.  However, if you do have a material change, you must add a third-page exhibit to Form CRS to describe this material change.  This is similar to Item 2 on the Part 2A Brochure. Uploading a revised Form CRS without a third page risks a deficiency.

Perennial Decisions

• Discretionary versus Non-Discretionary Assets – The ADV has specific instructions on what assets may be included as regulatory assets under management (“RAUM”). When RAUM is down there comes a temptation to reclassify non-discretionary assets as discretionary. Resist this temptation. RAUM is one of the key data points the SEC tracks. Agreements with clients and other advisers within sub-advisory arrangements, current disclosures of asset management services, and past reporting should be consistent.
• Soft Dollars and Firm Benefits – This is an area where examiners tend to ask a lot of questions. It also creates a consistency issue between your ADV, your policies and procedures, best execution and/or trade practices reviews, and compliance testing. If your firm is updating Item 12 of Part 2A.
• Updating Private Fund Audit Questions – Section 7.B.23(h) must be updated when you receive the financial audit if your annual amendment shows “Report Note Yet Received” as your answer. Section 7.B.23(g) must be updated when you deliver audited financial statements to the private fund’s investors. Note that once the deadlines pass for the required completion and delivery dates, an SEC examiner will look at these questions as an indication that your firm did not meet its audit requirements or, at a minimum, failed to timely report this change on your ADV.

Post-mortem

Once you file your ADV and save all of the supporting documentation, the following best practices will help you on the next ADV amendment.

1. Be honest on time – assess how long it took to reach a final draft. Commit to starting earlier next year and make a note of it now.
   • Next time around, should we aim for a final draft by mid-March?
   • Should you set an earlier deadline for hard-to-generate data?
2. Map sources and determinations
   • Who provides data, what system, what software, and what was the most difficult to get? You are aware of it now but may forget it 12 months from now.  Make some notes to make collection easier in the future.
   • Document your decisions now on determinations around what conflicts needed disclosure, the methodology for reporting client RAUM in Part 1 and Part 2A, and other determinations. This will give you a head start next time and build in consistency.
3. Spotlight areas for improvement
   • Note anything that can improve the process in the future.
   • Use ADV data and determinations as a jumping-off point for reviewing the effectiveness of your compliance program.
   • Questions in the drafting of Part 2A disclosures could inform compliance testing and reveal policies and procedures that need revision.