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Client Disclosure Documents and Delivery Requirements

Compliance Today
Blog #4
Date: September 6, 2017

ADV Disclosure Documents – Who, What, When, Where, Why, and How?

Did you know that in 2015 20% of all SEC Exams resulted in deficiencies regarding the ADV disclosure documents, up from 18% in 2013?   Hello and welcome to Compliance Today!   We hope you enjoy our blog posts and find the information helpful in your day to day business. If you have questions regarding this post or any previous post please email us at compliance@him-ria.com and we will be happy to help anyway that we can!

Today we are going to be discussing the Form ADV disclosure documents.  Despite much guidance provided on the proper completion and delivery requirements of the Form ADV, it continues to frequently cause compliance issues for investment advisory firms.   We will be discussing each section of the ADV along with the delivery requirements.  The delivery requirements are set forth in Rule 204-3 of the Investment Advisors Act of 1940.

The Form ADV is used by investment advisors to register with both the SEC and state securities authorities.   The form consists of two parts as explained below.

You can view any RIAs Form ADV on https://adviserinfo.sec.gov/IAPD/Default.aspx.

Please note that when clients sign our Quarterly Client Agreement, they are acknowledging receipt of the Form ADV 2A Firm Brochure, Form ADV 2B Brochure Supplement and our Notice of Privacy Practices.   Therefore it is imperative that you actually provide these documents as outlined below.


ADV Part 1

The Form ADV Part 1 discloses information about the investment advisor’s business, ownership, clients, employees, business practices, affiliations and any disciplinary events of the advisor or its employees.   The ADV Part 1 generally contains information that is important to the regulators, and is used in the registration process and to manage regulatory and examination programs. The Firm is required to update the ADV Part 1 within 90 days of its fiscal year end (for Horter this is March 30th) or within 30 days of a material change. The ADV Part 1 is not required to be given to clients at any time.


ADV Part 2A

The Form ADV Part 2A acts as the principal disclosure document that investment advisors provide to their clients.  It is commonly referred to as the “Firm Brochure” and provides information such as the types of advisory services offered, the advisor’s fee schedule, whether any conflicts of interest are present, and any disciplinary actions against the firm. The ADV Part 2A Firm Brochure is required to be written in plain English format.

As an IAR you must comply with the requirement to provide clients and prospective clients with a copy of the ADV Part 2A before or at the time the client enters into an advisory contract with Horter Investment Management.   If you fail to provide this important disclosure document you put the firm and your registration at risk.

The Firm is required to update the ADV Part 2A within 90 days of its fiscal year end (for Horter this is March 30th) or within 30 days of a material change. Each year the Firm is responsible for delivering the ADV Part 2A to clients within 120 days of year end.   Alternatively, the firm can provide to each client a summary of material changes along with an offer to provide the full ADV Part 2A upon request. This is referred to as the Annual Offer Letter. You can find the most updated HIM ADV Part 2A on this website under “Operational Forms”. It is important to remember not to save this document to your computer as it could be updated throughout the year at any time.


ADV Part 2B

The ADV Part 2B is commonly referred to as the “Brochure Supplement” and it discloses information regarding the specific person, acting on behalf of the investment advisor, who actually provides the investment advice to the client.  The ADV Part 2B discloses the educational and business background of the person providing advice, along with their disciplinary history, and includes the contact information for the person’s supervisor in case the client has a concern about the person. It must be amended promptly if information becomes materially inaccurate.

 The ADV Part 2B Brochure Supplement must be given to clients before or at the time the client enters into an advisory contract with Horter Investment Management.  Failure to provide clients with this important disclosure document is a major compliance violation and could jeopardize your continuing registration with the firm.

While there is no requirement to provide the ADV Part 2B to clients annually, such as with the ADV Part 2A, the advisor is required to provide clients with an updated Brochure Supplement in cases where an amendment adds a disclosure or materially revises information about an existing disclosure. It is also a best business practice to provide the brochure supplement to your clients during any seminar, workshop, or college course class.

Horter’s compliance department will work with IAR’s to draft their ADV Part 2B during their initial onboarding and when updates are needed.   It is the advisor’s responsibility, however, to always ensure that their Brochure Supplement is accurate and up to date.  

Money Manager ADV’s and Mutual Fund Prospectuses

The money managers used by Horter are generally structured as RIA’s similar to Horter Investment Management. Per the terms of Horter’s advisory contracts with these money managers, Horter is required to provide the money manager’s Form ADV Part 2A to new or prospective clients. You should provide your clients/prospects the ADV’s for any managers they will be invested in at the time you give them Horter’s ADV, prior to entering into an advisor contract. These are located on our website under “Manager/Strategy Information” and like the Horter ADV should not be saved to your computer as they can be updated at any time through the year.

In the case of mutual funds, there is not an ADV to give to clients/prospects. Mutual funds have prospectuses which contain important information about the fund, including the fund’s investment objectives or goals, its strategies for achieving those goals, the principal risks of investing in the fund, the fund’s fees and expenses, and its past performance. The client will receive a copy of the prospectus after the purchase of shares.   The prospectus will be mailed by the custodian (i.e. TCA or TD), typically within 3 business days of settlement.

Electronic Delivery

Many advisors want to utilize electronic delivery for the ADV’s, as this not only saves trees but could streamline the process.  Electronic delivery is permitted as long as the SEC guidance on electronic delivery is followed. The SEC has stated that there are three rules to follow in regards to electronic delivery;

1. Notice – a client needs to know to look for electronic delivery
2. Access – the client must have the ability to receive an e-mail, for instance
3. Evidence of Delivery

One way to satisfy that first and second requirement is by obtaining the clients consent to deliver through a specified electronic medium.   Clients can sign our “Electronic Delivery Consent Form”. If you would like to send the ADVs or other Horter documents to your client electronically you must have this form signed by the client prior to sending the ADVs or other documents to them. This form is located on our website under “Operational Forms”.   Be sure to submit this form to your new business support person along with the new account documents.  To satisfy the last requirement, you can select “Request a Delivery Receipt” in your email options.    Keep in mind that this falls under the books and records requirements and so you must keep records of the delivery of these documents.


To summarize what we have gone over here is an example of what you should give to a client:

You have a prospect coming to your office to sign his new account paperwork.   They will be investing their assets with Anchor Hedged Fixed Income, Anchor Alternate Equity and Potomac EVO-1, along with the BTS Tactical Fixed Income Fund and Wedco Power Dividend Index Fund. 

In addition to all of the HIM and Custodian Paperwork you must give them;

1. Anchor Capital Management ADV 2A
2. Potomac Advisors ADV 2A
3. Horter Investment Management ADV 2A
4. Your ADV Part 2B

Since two of the strategies belong to Anchor, you are only required to provide them one copy of the Anchor ADV 2A. And since two of the strategies are mutual funds, you would not have to provide them any prospectus since the custodian does this for you once the shares are purchased.

We hope that this has clarified what are the different types of ADVs and that this helps avoid exam deficiencies in the future!  Like always, if you have any suggestions for future blog posts please let us know… and have a great day!

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