Disclosing Disciplinary Events on Form ADV Part 3 for RIAs

The best advisor–client relationships are built on trust and professionalism. In many ways, that professional trust is built by following the proper procedures for reporting and compliance, such as properly disclosing disciplinary events on Form ADV Part 3.

Following the procedures designated by the United States Securities and Exchange Commission (SEC) also reduces your likelihood of a claim.

However, data indicates that not all advisory firms are in compliance with current disclosure requirements. The SEC Office of Compliance Inspections and Examinations (OCIE) has responded with increased scrutiny of forms for compliance.

Noncompliance carries risk and could result in regulatory actions and damaged client relationships, so make sure you understand your obligations.

Form ADV Part 3 for RIAs and Its Compliance Requirements

Form ADV Part 3 is intended to be a concise and understandable disclosure for retail investors, providing information about an investment advisor firm, including:

  • Offered relationships and services
  • Fees and costs retail investors will pay
  • Specified conflicts of interest
  • Standards of conduct
  • Disciplinary history

The requirements for Form ADV Part 3 disclosure apply to all investment advisers registered or applying for registration with the SEC. A key part of the disclosure is the Form ADV Part 3 relationship summary.

This disclosure must provide true and complete information about the firm and its retail investor services in plain English while avoiding legal jargon.

A single, uniform Form ADV Part 3 is required to be created, maintained and disclosed to all “retail investors,” defined as a natural person or their legal representative receiving or seeking to receive services primarily for personal, family or household purposes.

Lockton Affinity Advisor partner RIA has more resources on Form ADV Part 3 for RIAs here.

Failure to Report Necessary Disclosures

Proper compliance with SEC requirements is a necessity. The initial compliance date for Form ADV Part 3 was June 2020. Following this date, SEC registered investment advisor firms have become eligible for examinations of compliance.

If selected for an examination by the OCIE, SEC representatives may request and review outside documentation, such as Form ADV Part 2 and advisory contracts, for consistency and practices.

Such reviews will go well, if you are in compliance. However, a recent analysis by the Wall Street Journal found as many as 1 in 5 firms reporting no disciplinary events on Form ADV Part 3 had failed to properly disclose relevant legal or disciplinary events.

Failing to report the necessary disclosures can have a significant impact on your firm. The SEC’s increased scrutiny of advisors’ compliance may lead to regulatory fines and penalties if a discrepancy is discovered.

However, even if your records are not examined, nondisclosure could cause problems with clients and lead to a claim.

Steps to Ensure Proper Disclosure

Compliance with SEC Form ADV Part 3 requirements can put your mind at ease and minimize the risk to your firm. The following steps can help ensure proper disclosure:

  1. Review the Form ADV relationship summary, checking for proper disclosure of disciplinary events
  2. Examine underlying disclosures made or required to be made in Form U4 and/or Form ADV Part 2
  3. Implement a robust compliance program, ensuring Form ADV Part 3 relationship summary is updated, filed and delivered as needed on an ongoing basis
  4. Consider performing in-house compliance testing to ensure you are ready for any potential SEC examination
  5. Ensure your policies and procedures designate one or more specific individuals to be responsible for each aspect of compliance
  6. Undertake regular reviews for consistency with your firm’s other materials, including disclosure brochures, advisory contracts and advertisements
  7. Put procedures in place to ensure all required disciplinary and legal events are reported to the firm and disclosed on the proper forms

The Lockton Affinity Difference

Like many advisors, you work hard to build trust with your clients and practice diligence and professionalism when it comes to disclosures and regulatory compliance. At the same time, even the best advisors can make a mistake which may lead to a regulatory issue or a claim.

Given the risks, it makes sense to protect your firm and career with the best Errors and Omissions coverage.

While other industry groups and associations offer Errors and Omissions Liability Insurance policies with shared aggregate limits, Lockton Affinity Advisor offers coverage with individual limits, so that you will always have access to your full policy limits.

Plus, Lockton Affinity Advisor coverage meets ERISA standards, including services as an ERISA 3(21) and 3(38) advisor.

Make sure your business is covered with Lockton Affinity Advisor. Getting coverage is quick and easy.

Your Lockton Affinity Errors and Omissions Liability policy will take effect 12 a.m. local time the day following purchase.