Form ADV Part 2: the brochure and brochure supplements

Form ADV Part 2A is the firm brochure: a plain English narrative of an adviser's services, fees, conflicts and disciplinary history that every registered adviser must give clients before or when they sign. Part 2B is the brochure supplement: the same kind of disclosure about each individual who advises the client. Rule 204-3 sets when each is delivered, and the instructions to Part 2 set what goes in them.

The brochure is also the primary place an adviser meets its fiduciary disclosure obligation. The General Instructions to Part 2 say that, as a fiduciary, you must disclose all material facts and all material conflicts of interest with enough specific detail that the client "can give informed consent to such conflicts or practices or reject them." That may require more than the items themselves ask for.

Who must prepare a brochure

• SEC-registered advisers and applicants. Part 2A applies to every adviser registered or applying for registration with the SEC, and must be filed through IARD as a text-searchable PDF (Rules 203-1 and 204-1).
• State-registered advisers, under similar state rules. They also answer Item 19 of Part 2A and Item 7 of Part 2B, and file their supplements with the states.
• Not exempt reporting advisers. Part 2 does not apply to them.

An adviser with no clients to whom it must deliver a brochure need not prepare one. A new firm answers based on the services and practices it proposes to provide (Part 2A Instruction 14).

What Part 2A must contain

The brochure must answer each item, in order, under the item's heading. If an item does not apply, say so.

1. Cover Page. Name, address, contact details, website, date, and the prescribed statement that the brochure has not been approved by the SEC or any state. If you call yourself "registered," state that registration does not imply a certain level of skill or training.
2. Material Changes. The annual summary, covered below.
3. Table of Contents.
4. Advisory Business. Including principal owners (those owning 25% or more) and client assets managed on a discretionary and non-discretionary basis. That figure may be rounded to the nearest $100,000, and the "as of" date must be no more than 90 days before the date you last updated Item 4.E.
5. Fees and Compensation. The fee schedule, whether fees are negotiable, how they are billed, other costs clients bear, prepaid fee refunds, and any compensation from selling securities.
6. Performance-Based Fees and Side-By-Side Management.
7. Types of Clients. Including account minimums.
8. Methods of Analysis, Investment Strategies and Risk of Loss.
9. Disciplinary Information.
10. Other Financial Industry Activities and Affiliations.
11. Code of Ethics, Participation or Interest in Client Transactions and Personal Trading.
12. Brokerage Practices. Including soft dollars, brokerage for client referrals, directed brokerage and trade aggregation.
13. Review of Accounts.
14. Client Referrals and Other Compensation.
15. Custody.
16. Investment Discretion.
17. Voting Client Securities.
18. Financial Information.
19. Requirements for State-Registered Advisers. State advisers only.

Three items that need the most care

Item 9, disciplinary information. Events listed in Items 9.A to 9.C are presumed material and must be disclosed for ten years from the date of the event, unless the event was resolved in your favor or you rebut the presumption. If you rebut it, Rule 204-2(a)(14)(iii) requires a memorandum explaining why, discussing the factors in the Item 9 note. The list is not exhaustive, and an older event that is still material must still be disclosed.

Item 18, financial information. If you require or solicit prepayment of more than $1,200 in fees per client, six months or more in advance, include an audited balance sheet for your most recent fiscal year. For state-registered advisers the threshold is more than $500. Advisers with discretion or custody, or that take such prepayments, must also disclose any financial condition reasonably likely to impair their ability to meet commitments to clients, and any bankruptcy petition in the past ten years.

Conflicts, written as facts. The General Instructions say that if you have a conflict or engage in a practice only for some clients, say so, "rather than disclosing that you 'may' have the conflict." A brochure full of "may" describes nothing.

What Part 2B must contain

A supplement covers one supervised person, under six headings (seven for state-registered advisers):

1. Cover Page, including the prescribed statement.
2. Educational Background and Business Experience. Name, age or year of birth, formal education after high school, and business background for the preceding five years. If you list professional designations, explain the minimum qualifications for each.
3. Disciplinary Information. Presumed material events for ten years, as in Part 2A.
4. Other Business Activities.
5. Additional Compensation. Economic benefits from non-clients, including sales-based bonuses.
6. Supervision. How the firm supervises the person, and the name, title and telephone number of the supervisor.
7. Requirements for State-Registered Advisers.

Who needs a supplement

Part 2B Instruction 1 requires a supplement for any supervised person who:

• formulates investment advice for a client and has direct client contact, or
• has discretionary authority over a client's assets, even without client contact.

No supplement is needed for someone without client contact who exercises discretion only as part of a team. Where a team of more than five provides the advice, supplements are needed only for the five with the most significant responsibility for the day-to-day advice (Rule 204-3(b)(3)).

Supplements are not required for clients who do not need a brochure, clients who receive only impersonal investment advice, or clients who are the firm's own executive officers, directors and certain investment employees. A sole proprietor can put the supplement information in the firm brochure. When supplement information is included in the brochure, it goes at the end.

When to deliver

Rule 204-3(b):

• The brochure: before or at the time you enter into the advisory contract, even if the agreement is oral.
• Each supplement: before or at the time that supervised person begins to provide advisory services to the client.
• Annually, within 120 days of fiscal year end, if the brochure has changed materially since the last annual updating amendment: the current brochure, or the summary of material changes with an offer of the brochure and the website, e-mail, telephone and IAPD details for getting it.
• Promptly, when an amendment adds or materially revises disciplinary information in Item 9 of Part 2A or Item 3 of Part 2B. A supplement update can take the form of a dated "sticker."

Clients that are registered investment companies or business development companies under a contract meeting Section 15(c) of the Investment Company Act, and clients who receive only impersonal advice costing less than $500 a year, do not need a brochure (Rule 204-3(c)).

Electronic delivery is permitted under the SEC's interpretive guidance on electronic media, which the Part 2 instructions cite (Release 33-7288).

The annual summary of material changes

Item 2 requires, when you amend the brochure for the annual update and it contains material changes from the last annual update, a discussion of those changes on the cover page, the next page, or in a separate document. It must say that it covers only material changes since the last annual update and give that update's date.

• If there are no material changes, and no interim amendment made material changes during the year, no summary is needed and no annual delivery is required (Part 2A Instruction 5).
• If the summary is a separate document, file it as an exhibit to the brochure in the same PDF.
• A client who has never received a previous version does not need the summary.

The annual amendment guide covers the filing that this delivery follows.

Keeping it current

Update the brochure each year with the annual amendment, and promptly whenever information in it becomes materially inaccurate. You do not have to amend between annual filings solely because client assets (Item 4.E) or the fee schedule (Item 5.A) changed. Supplements are updated promptly whenever they become materially inaccurate. SEC-registered advisers file brochure amendments through IARD; they do not file supplements but must keep them.

Between annual amendments, the fiduciary duty still applies. The Part 2A instructions note that you must disclose material changes to clients even if they do not trigger delivery of an interim amendment.

Records

Rule 204-2(a)(14) requires you to keep:

• each brochure, supplement and Form CRS, and every amendment
• each summary of material changes not contained in the brochure
• a record of the dates each was given to each client and to each prospective client who became a client
• documentation of the method used for Item 4.E if it differs from the method used for regulatory assets under management
• the memorandum for any presumed-material disciplinary event you did not disclose

What examiners look for

The library's notes on Rule 204-3 and the Division's 2023 observations on newly registered advisers point to the same problems:

• Disclosures about fees, services, affiliations, AUM and number of clients that do not match the firm's practice.
• The brochure on the website differing from the one filed.
• An annual offer that was never sent, or no record of who received it.
• Disciplinary updates held until the annual mailing.

Common questions

What is the difference between Form ADV Part 2A and Part 2B?

Part 2A is the firm brochure, about the adviser as a whole. Part 2B is a brochure supplement about an individual supervised person who gives advice or has discretion over a client's account.

Do I have to file Part 2B with the SEC?

No. SEC-registered advisers do not file brochure supplements, but must prepare them, deliver them and keep copies under Rule 204-2(a)(14). State-registered advisers do file them, through IARD.

How often do I have to deliver my ADV Part 2 to clients?

At or before signing, and then each year within 120 days of fiscal year end if there have been material changes, either the full brochure or a summary with an offer. Disciplinary changes are delivered promptly.

Can I deliver the brochure by email?

Yes, consistent with the SEC's guidance on electronic delivery. Keep a record of the date it was delivered to each client.

Do I need a summary of material changes if nothing changed?

No. If the brochure has no material changes since the last annual update, and you filed no interim amendment making material changes, you do not need a summary and you do not have to deliver anything to existing clients that year (Part 2A Instruction 5).

Write it once, keep it current

The regulatory filings template assigns ownership of the brochure, the supplements and the annual delivery, and the books and records template covers the delivery records Rule 204-2(a)(14) requires. Luna's compliance calendar seeds the obligations that fit your registration type and reminds the person each one is assigned to before it is due.