Avoiding Common Deficiencies

IMPORTANT NOTICE:

AVOIDING COMMON DEFICIENCIES FOUND IN INVESTMENT ADVISER APPLICATIONS

The Examiners of the Registration Division are responsible for reviewing and issuing comment letters to those persons who apply for registration as investment advisers and investment adviser representatives. Avoiding common deficiencies when preparing Form ADV Parts 1 and 2 and investment advisory agreements will help speed up the review of your application.

The most common errors found in an application are related to inconsistencies between Part 1, as filed on the IARD system; the new "plain language" narrative Part 2; and the investment advisory agreement/contract.

Form ADV, Parts 1 and 2

To avoid the most common deficiencies, please follow these guidelines:

  • Ensure:
    • The types of clients listed on Item 5.D of Part 1 match Item 7 of Part 2.A.
    • The type of compensation listed on Item 5.E of Part 1 matches Item 5 of Part 2.A.
    • The fee schedule listed in Item 5 of Part 2.A matches the fee schedule in the investment advisory agreement/contract.
    • How often fees are paid as listed in Item 5 of Part 2 matches the investment advisory agreement/contract.
    • Services marked in Item 5.G of Part 1 match the services described in Item 4 of Part 2.A.
    • Discretionary authority marked in Item 8.C of Part 1 matches the discretionary authority described in Item 16 of Part 2.A. Additionally, you must discuss the restrictions or limitations imposed by your clients.
  • If you list other business in Item 6 of Part 1, discuss the other business in Item 10 of Part 2.A.
  • In part 2, do not state that you are "registered with the U.S. Securities and Exchange Commission" or "registered under the Investment Advisors Act of 1940."
  • Do not reference or use the fact of your registration in public displays or advertisements in connection with rendering of services as an investment adviser. See Section 20 of the Act.
  • If you are registering or registered with one or more state securities administrators and you receive more than $500 in fees per client six months or more in advance, include both the required balance sheet and financial condition disclosures for Items 18.A and 18.B of Part 2.
  • Update references in the investment advisory agreement from the "ADV Part II" to the newly adopted "ADV Part 2."

Investment Advisory Agreements

In addition, the Examiners also review and comment on the applicant's investment advisory agreement(s). To avoid deficiencies, please follow these guidelines:

  • The following items should be discussed in the agreement and should be consistent with the information found in Form ADV Parts 1 and 2:
    • A description of services to be rendered by the adviser;
    • a fee schedule;
    • whether fees are charged in advance or in arrears;
    • how often fees are paid;
    • whether fees are negotiable;
    • whether fees are withdrawn from the client's account;
    • the firm's termination policy; and
    • a refund policy, if applicable.
  • The agreement must contain the exact language found in Texas Rule 116.12(a)
  • The agreement must contain a non-assignment clause as described in Texas Rule 116.12(c) This rule requires the client's written consent before the agreement can be assigned by the adviser.
  • The fee schedule in the agreement must match the fee schedule discussed in the Form ADV Part 2. Additionally, the type of compensation described in the contract must match what was described in Item 5 of Part 2.A and the form of compensation marked in Item 5.E of Part 1.
Topic ADV I Item ADV 2A Item ADV 2B Item
Employees as Registered Reps 5B(2) 10A 4A
Employees are insurance agents 5B(5) 10C 4B
Use of solicitors 5B(6), 8H 14B  
Types of clients 5D 7  
Compensation 5E 5A 5E 10D 14 4A, 4B
Performance Fees 5E 6, 19C  
Assets under management 5F 4 ( do not have to match, but must be w/in 90 days)  
Services provided 5G 4  
Wrap Program 5I 4D, if so,  Appendix 1 is required  
Advise on limited security types 5J 4B  
Other financial business 6A 5E, 10A,10B, 10C  
Other business or services 6B 19B  
Financial industry affiliations 5B, 7A 10A, B, and/or C, 19E  
Private Fund Adviser
Please submit: LPA, PPM and Sub Docs
7B 4, 5, 10C  
Your interest in client trades 8A 11B, 11C, 11D  
Sales interest in client trades 8B, 5B, 7B 11B  
Discretion 8C 4, 16, 18B  
Related brokers 8D, 8F 10A, 10C  
Recommend brokers 8E 12A  
Soft dollars 8F, 8G 12A  
Receive pay for referrals 8I 10D, 14A  5
Custody 9 15, 18B  
Disciplinary disclosures 11 9, 19D 3, 7
Direct Owners Schedule A 4, 19A