As investment advisors prepare to file annual updates to registration documents with state and federal regulators, compliance experts are stressing the importance of playing it straight with the numbers and ensuring that advisors' forms contain full, accurate disclosures.
"This is an area that regulators are looking at very closely and they're cracking down on," says Tammy Emsick of Omaha, Neb.-based RIA Compliance Consultants.
Registered investment advisors must file an annual updating amendment to Form ADV within 90 days of the close of their fiscal year - which for many practices coincides with the calendar year. (For advisors whose fiscal year ended Dec. 31, the forms would normally be due by March 31, although since that date falls on a Sunday this year, the SEC has extended the deadline to April 1.)
Dodd-Frank provisions mandate that advisors with assets under management of $100 million or more register with the SEC, while practices with assets less than that threshold are generally required to register with their state government.
While it could be argued variously that either federal or state registration is the more advantageous regulatory framework - depending in part on which state an advisor is based in - advisors who massage assets in either direction are courting trouble, Emsick says.
The relevant portion of the updated Form ADV is found in Item 5 of Part 1A, where advisors are asked to disclose their "regulatory assets under management [including] the securities portfolios for which you provide continuous and regular supervisory or management services as of the date of filing this Form ADV." An account is deemed a securities portfolio if at least 50% of its value is attributable to securities, including cash and cash equivalents. Advisors are also expected to include family or proprietary accounts, as well as uncompensated accounts.
"It's supposed to be as objective as possible," says Lawrence Stadulis, a partner in Washington with the law firm Stradley Ronon Stevens & Young and a former special counsel in the SEC's Division of Investment Management. "When the SEC does the exams, one of the first things they do is read the Form ADV."
On Part 2 of Form ADV, where advisors are asked to provide a "plain English" description of their practice, the strict regulatory AUM calculus no longer applies, and advisors are permitted to include a more expansive figure describing AUM. But compliance experts say advisors are at risk when an examiner uncovers discrepancies in the firm's Part 2 description and other representations of the practice, such as its website or advertising materials.
"Form ADV [is] a critical part of an advisor's books and records," says Duane Thompson, senior policy analyst with Fi360, an advisor consultancy. It's "one of those gotcha problems for investment advisors."
Kenneth Corbin is a Financial Planning contributing writer in Washington.