Now, the SEC wants you to be a writer, too?

By now, you’ve heard there is a new Form ADV Part 2 requirement for registered investment advisers. As a result of the new rule, completing Form ADV Part 2 is no longer a check-the-box exercise. See New regulatory world dawns with oppressive ADV Part 2 form. Part 2A requires RIAs to create narrative brochures, which contain specified information about the advisory firm. Part 2B requires RIAs to create brochure supplements, which contain information regarding certain supervised persons.

It’s a narrative, not a novel

As you create narrative brochures describing your firm, as well as supervised persons, try to avoid being too creative. Even if you’re a frustrated novelist like me, Form ADV Part 2 should not look like an essay you wrote for a creative writing class. In addition, securities regulators won’t look favorably if you take poetic license with your Form ADV Part 2 brochure.

Form ADV brochures should be written in plain English in a specified format. While that format may stifle your creativity, the SEC adopted this requirement so that investors may compare your firm to other RIAs they might wish to engage. RIAs are required to respond to each item and present their information in order, using the headings indicated in the form. You can, however, create your own subheadings.

If a particular item does not apply to their firm, RIAs must state explicitly that it is inapplicable. Make sure you read each item thoroughly, because it is easy to misinterpret what type of information is required.

The instructions for Part 2 make it clear that you are writing a brochure, not the Great American Novel. You must use short sentences containing everyday words. Your narrative should use the active voice. Words must be definitive and concrete. As always, you should be looking for language that unsophisticated investors can understand.

Brochure supplements

Part 2B requires RIAs to provide information regarding the advisory personnel actually giving investment advice. Brochure supplements contain information relating to that person’s educational background, business experience, and disciplinary history. Previously, Form ADV Part 2 only provided information regarding the firm’s senior executives not necessarily the investment adviser representative (“IAR”) who was working directly with the client. Before this change occurred, clients of a large RIA with many IARs might not learn anything about the person handling their account from Form ADV.

RIAs do have more flexibility in writing brochure supplements, so firms can utilize the most cost-effective approach for presenting required information. Nevertheless, brochure supplements must also be organized in the same order and with the same headings as those items appear in the instructions. A uniform format makes it easier for investors to compare RIAs and IARs.

Though challenging to write, the brochure supplement will be a valuable document for investors, as well as RIAs. Advisory firms will have an even greater incentive to hire well-qualified applicants, since their credentials will be readily available to prospective clients. The qualifications of an IAR might make the difference between a prospective client signing on with the RIA or going elsewhere for advice.

Problems to avoid

Securities regulators have always frowned upon the use of boiler-plate language. You should only be describing business practices your firm is engaged in, or likely to engage in, not those that have no bearing on your business model. While this may be a difficult process, you might reap benefits in the long run. A well-written brochure can be an effective and compliant marketing tool. Furthermore, the process of preparing a narrative in plain English can improve your ability to explain your investment strategies and business practices succinctly and accurately.

And here’s one last tip. You should avoid starting your narrative with, “It was a dark and stormy night.” That opening line is a tip off that you’re about to read a bad novel and a badly drafted Form ADV Part 2.

Les Abromovitz is a senior consultant with National Compliance Services, Inc. Les, an attorney, is the author of Growing Within the Lines: The Investment Adviser’s Advertising and Marketing Compliance Guide (Available on Amazon.com or through NationalUnderwriterStore.com). He can be reached at 561-330-7645, Ext. 213, or at LAbromovitz@ncsonline.com.