Form ADV Part 2B: the brochure supplement

Form ADV Part 2B is the brochure supplement: a short disclosure document about an individual at the firm who gives a client investment advice or makes discretionary decisions for that client's account. It sits beside the Part 2A firm brochure, and it tells the client who that person is, what their education and experience are, whether they have a disciplinary history, what else they do for money, and who supervises them.

Rule 204-3 under the Investment Advisers Act sets when supplements are delivered, and the Instructions for Part 2B of Form ADV set what goes in them. SEC-registered advisers do not file supplements with the SEC, which is one reason they drift out of date. They still have to prepare them, deliver them on time and keep every version.

This guide covers who needs a supplement, what each item asks for, delivery and updates, the exceptions, and the records. The Form ADV Part 2 guide covers the firm brochure in detail.

Who needs a brochure supplement

Instruction 1 to Part 2B, which tracks Rule 204-3(b)(3), 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 if that person has no direct client contact.

A supervised person is any partner, officer, director or employee of the adviser, or anyone else who provides investment advice on the adviser's behalf and is subject to its supervision and control (Advisers Act Section 202(a)(25)). That can include independent contractors who advise clients under the firm's supervision.

Two people who often fall through the gap are the portfolio manager who never meets clients but places trades in their accounts, who needs a supplement because of the discretion, and the relationship manager who meets clients but does not formulate advice, who may not. The test turns on what each person actually does for a given client, so the analysis is done person by person and client by client rather than by job title.

The team exceptions

The instructions carve out two situations:

• Discretion only as part of a team, with no client contact. No supplement is required for a supervised person who has no direct client contact and has discretionary authority over a client's assets only as part of a team.
• Teams of more than five. Rule 204-3(b)(3) provides that where investment advice for a client is provided by a team of more than five supervised persons, supplements need only be delivered for the five with the most significant responsibility for the day-to-day advice provided to that client. The Part 2B instructions describe the same limit in terms of discretionary advice.

If you rely on either exception, write down which team it applies to and how you chose the five. That is the first thing an examiner will ask about.

Clients who do not need supplements

Instruction 2 and Rule 204-3(c)(2) list three categories of client to whom you do not have to deliver supplements:

1. Clients to whom you are not required to deliver a firm brochure, such as a registered investment company whose advisory contract meets Section 15(c) of the Investment Company Act.
2. Clients who receive only impersonal investment advice, even if they receive a firm brochure.
3. Clients who would be "qualified clients" of your firm under Rule 205-3(d)(1)(iii): your own executive officers, directors, trustees, general partners and people in similar roles, and employees (other than clerical, secretarial or administrative staff) who participate in the firm's investment activities and have done so for at least 12 months.

Sole proprietors and small firms

A sole proprietor does not need a separate supplement if the supplement information is in the firm brochure (Instruction 7). More generally, Instruction 6 lets any firm put supplement information into its brochure instead of producing separate documents. If you do that, the supplements must appear at the end of the brochure, follow the order of the Part 2B items, use the same headings, and present each supervised person in a separate section. Firms may also prepare group supplements covering several people, under the same rule of one section per person.

What each item requires

Part 2B has six items for SEC-registered advisers and a seventh for state-registered advisers. Each item is answered under its own heading.

Item 1: Cover page

The cover page names the supervised person and gives their business address and telephone number if different from the firm's, the firm's name, address and telephone number, and the date of the supplement. If the firm brochure uses a business name, the supplement uses the same one.

It must also carry a statement, in the prescribed words or clear and concise language conveying the same thing, that identifies the document as a brochure supplement, says it supplements the firm brochure, tells the client whom to contact if they did not receive the brochure, and points to additional information on the IAPD website. The IAPD sentence is required only if the supervised person is an investment adviser representative required to register with state securities authorities. If other material appears on the cover page, the required information goes at the top of the first page.

Item 2: Educational background and business experience

Disclose the person's name, age or year of birth, formal education after high school, and business background for the preceding five years, including the specific positions held. If the person has no high school education, no formal education after high school, or no business background, say so.

Professional designations may be listed, but each one listed needs an explanation of the minimum qualifications required to hold it, detailed enough that a client can understand its value. A list of letters after a name with no explanation does not meet the item.

Item 3: Disciplinary information

Disclose all material facts about any legal or disciplinary event that is material to a client's evaluation of the supervised person. Items 3.A to 3.D list events presumed to be material:

• 3.A, criminal or civil actions: convictions and pleas for any felony and for listed misdemeanors (investment-related, fraud, false statements, wrongful taking of property, bribery, perjury, forgery, counterfeiting, extortion), pending criminal proceedings of those kinds, findings of involvement in a breach of an investment-related statute or regulation, and injunctions limiting investment-related activity.
• 3.B, administrative proceedings before the SEC, another federal or state agency or a foreign financial regulator, where the person was found to have caused a business to lose its authorization, or was found to have been involved in a breach of investment-related rules and was barred, suspended, significantly limited or fined above the threshold the item sets.
• 3.C, self-regulatory organization proceedings with similar findings and sanctions.
• 3.D, other hearings in which a professional attainment, designation or license was revoked or suspended for breaching rules of professional conduct, including where the person resigned or relinquished it in anticipation of the hearing and the firm knew or should have known.

Presumed-material events must be disclosed for ten years from the date of the event, which is the date the final order, judgment or decree was entered, or the date any rights of appeal from preliminary orders lapsed. There is no disclosure duty if the event was resolved in the person's favor or was reversed, suspended or vacated.

Two points catch firms out. First, the list is not exhaustive: an event that is not listed but is material to a client's view of the person's integrity must be disclosed. Second, the ten years is not a safe harbor: an older event that is so serious it remains material today must still be disclosed.

Rebutting the presumption. A firm may conclude that a listed event is not material, considering four factors: the person's proximity to the advisory function, the nature of the infraction, the severity of the sanction, and the time elapsed since the event. If it does, Rule 204-2(a)(14)(iii) requires a memorandum explaining the determination and discussing those factors. No memorandum means no rebuttal.

Electronic delivery shortcut. If you deliver the supplement electronically and a particular disclosure is available on FINRA's BrokerCheck or the IAPD, you may satisfy that disclosure by stating that the person has a disciplinary history, giving a hyperlink to the relevant system, and briefly explaining how the client can find the history there.

Item 4: Other business activities

4.A, investment-related activities. If the person is actively engaged in any investment-related business or occupation, including registration (or a pending application) as a broker-dealer, registered representative, futures commission merchant, commodity pool operator, commodity trading advisor or an associated person of one, disclose it and describe any relationship between that business and the advisory business. If the relationship creates a material conflict of interest, describe the conflict and generally how you address it. If the person receives commissions, bonuses or other compensation based on selling securities or other investment products, including distribution or service ("trail") fees from selling mutual funds, disclose it, explain any non-cash compensation, and explain that this gives the person an incentive to recommend products based on the compensation received rather than the client's needs.

4.B, other businesses. If the person is actively engaged in any other business or occupation for compensation that provides a substantial source of their income or takes a substantial amount of their time, disclose it and describe it. Activities representing less than 10 percent of the person's time and income may be presumed not substantial.

The outside business activities guide covers how to collect and review these activities, which is where the Item 4 answer should come from.

Item 5: Additional compensation

If someone who is not a client gives the supervised person an economic benefit for providing advisory services, generally describe the arrangement. Economic benefits include sales awards and other prizes, but not the person's regular salary. A bonus based even partly on the number or amount of sales, client referrals or new accounts counts as an economic benefit; other regular bonuses do not.

Item 6: Supervision

Explain how the firm supervises the person, including how it monitors the advice they give clients, and give the name, title and telephone number of the person responsible for supervising their advisory activities. A generic sentence repeated in every supplement says little. The answer should describe the review the firm actually performs, and the named supervisor should be the person who performs it. A sole principal who supervises themselves can say so, and describe the controls that apply.

Item 7: Requirements for state-registered advisers

State-registered advisers also disclose arbitration awards and findings of liability above the item's threshold, civil, SRO or administrative findings involving investment-related activity, fraud, theft, bribery or dishonest or unethical practices, and any bankruptcy petition, with its date and current status. SEC-registered advisers do not answer Item 7, though individual states may have their own requirements for representatives registered with them.

When to deliver a supplement

Rule 204-3(b) and Instruction 3 set two delivery points:

• At the start. Deliver the supplement for a supervised person to each client or prospective client before or at the time that person begins to provide advisory services to the client. When a new adviser joins a client's team, or a portfolio manager changes, the new person's supplement goes out at or before the moment they start.
• Promptly after a disciplinary change. If you amend a supplement to add a disciplinary event, or to materially revise information already disclosed about one, in response to Item 3, deliver promptly either the amended supplement with a statement describing the material facts of the change, or the statement alone (Rule 204-3(b)(4)). The instructions allow the update to take the form of a dated "sticker" identifying what has become inaccurate and giving the new information.

Unlike the firm brochure, there is no annual delivery requirement for supplements. A firm may have a supervised person deliver supplements, including their own, on the firm's behalf.

Supplements may be delivered electronically, consistent with the SEC's interpretive guidance on electronic delivery that the instructions cite (Release 33-7288). Whatever the method, keep a record of the date each client received each supplement.

When to update a supplement

Instruction 4 requires you to update a supplement promptly whenever any information in it becomes materially inaccurate. Common triggers include:

• a new disciplinary event, or a change in the status of one already disclosed
• a new outside business activity, or a new registration with a broker-dealer or insurance agency
• a change in compensation that creates a new incentive, such as a sales contest or a referral bonus
• a change of supervisor, or of supervisor contact details
• a new professional designation the person wants to list

The fiduciary duty runs alongside these rules. The instructions note that, between annual updating amendments, you must disclose material changes to clients even if those changes do not trigger delivery of an updated supplement.

A practical control is to tie supplement review to the events that cause changes: Form U4 amendments, the annual outside business activity certification, changes in team assignments, and the annual Form ADV update. The annual amendment guide covers the yearly filing that is a natural point to review every supplement at once.

Filing: SEC versus state

If you are registered or registering with the SEC, you are not required to file brochure supplements or their updates (Instruction 9). You must keep copies of all supplements and amendments in your files.

If you are registered or registering with one or more states, you must file through IARD a copy of the supplement for each supervised person doing business in that state.

Records you must keep

Rule 204-2(a)(14) requires an SEC-registered adviser to keep:

• a copy of each brochure supplement, and each amendment or revision to it
• a record of the dates each supplement, and each amendment or revision, was given to any client or to any prospective client who later became a client
• a memorandum for any presumed-material disciplinary event under Item 3 that the firm decided not to disclose, explaining why the presumption was overcome and discussing the Item 3 factors

Under Rule 204-2(e)(1) these records are kept for at least five years from the end of the fiscal year in which the last entry was made, the first two years in an appropriate office of the adviser. The books and records guide covers retention and electronic storage in more detail.

The delivery record is the one firms most often cannot produce. A supplement that was written but has no evidence of delivery is, for an examiner, a supplement that was not delivered.

Where supplements commonly go wrong

These are the practical gaps to test for in your own program, drawn from what the rule and instructions require:

• Missing people. Supplements exist for client-facing advisers but not for portfolio managers or traders with discretion, or for a newer hire who has started advising.
• Stale disciplinary information. The supplement does not match the person's Form U4 or their IAPD and BrokerCheck records.
• Outside activities that never made it in. An insurance license, a registered representative role or a paid board seat sits in the outside business activity log but not in Item 4.
• Designations without explanations of their minimum qualifications.
• Boilerplate supervision. Item 6 names a supervisor who has left the firm, or describes a review nobody performs.
• No delivery record, especially when a client's team changes.
• An undocumented rebuttal of a presumed-material event.

Common questions

Who needs a Form ADV Part 2B?

Any supervised person who formulates investment advice for a client and has direct contact with that client, and any supervised person who has discretionary authority over a client's assets, even without client contact. Exceptions apply for people who exercise discretion only as part of a team with no client contact, and for teams of more than five.

Do SEC-registered advisers file Part 2B?

No. SEC-registered advisers prepare, deliver and keep supplements but do not file them. State-registered advisers file a supplement through IARD for each supervised person doing business in the state.

Do I have to deliver Part 2B every year?

No. A supplement is delivered before or at the time the supervised person begins providing advisory services to the client, and updates are delivered promptly when they add or materially revise disciplinary information. Other updates must be made promptly when the supplement becomes materially inaccurate, and the firm's general duty to disclose material changes still applies.

Can the supplement go inside the firm brochure?

Yes. If the brochure contains all the information a supplement requires, no separate supplement is needed. The supplement information must appear at the end of the brochure, in the Part 2B order and headings, with a separate section for each person.

Does a solo adviser need a brochure supplement?

A sole proprietor does not need a separate supplement if the supplement information is included in the firm brochure. The information itself is still required, so a solo adviser's brochure should end with a section covering each Part 2B item about them.

Keep every supplement current

The regulatory filings template assigns ownership of the brochure and each supplement, and the books and records template covers the delivery records Rule 204-2(a)(14) requires. Luna's compliance calendar reminds the person responsible before the annual amendment, which is the natural moment to review every supplement alongside the firm brochure.