Transcript Slide 1

Dismantling the Form ADV
Brian S. Hamburger, JD, AIFA®, CRCP
Managing Director
August 3, 2009
NASAA Investment Adviser Training Workshop
Who is Investment Adviser?

Defining an Investment Adviser (“IA”)


You are an investment adviser if, for compensation, you are engaged in
the business of providing advice to others or issuing reports or
analyses regarding securities.
Who is excluded from the definition of an IA?
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Banks
Certain Lawyers, Accountants, Engineers, and Teachers
Certain Broker-Dealers and Registered Reps
Bona Fide Publishers
Advisers limited to US Government Securities
Government entities
Identifying the Scope of the Offering
3

Financial Planner


Comprehensive
Modular

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
Informal
Investment Consultant
Investment Manager
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
Education Funding ~ Retirement Planning ~ Estate Planning
Mutual Fund Asset Allocation
Separate Account Managers
Management of Individual Securities
Market Timing
Private Placements
Wealth Manager
Where to Register
4
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Assets Under Management
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If the adviser has less than $25 million in AUM, it must register at the
state level.
If the adviser has between $25-$30 million in AUM, it’s the adviser’s
choice whether to register at the state or SEC level.
If the adviser has over $30 million in AUM, it must register with the
SEC.
Where to Register
5

Other basis for SEC registration:
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Pension consultants with respect to assets of plans having an
aggregate value of at least $ 50 million
Advisers controlling, controlled by, or under common control with an
investment adviser registered with the Commission
Newly formed advisers expecting to be eligible for SEC registration
within 120 days of approval
Internet-only advisers
Introducing the Parts of the Form ADV
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Part 1

Used primarily by
regulators for
administrative purposes
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
Registration decisions
Inquiring into complaints
Managing examination
process
Available to the public
(www.adviserinfo.sec.gov)
Part II

Intended primarily for
client disclosure
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Scope of services
Fees
Conflicts of interest
Limiting liability
Furnished to each
prospective client and
offered to existing clients
A revised Part 2 of Form ADV

In March of 2008, the SEC re-proposed; however there has been no
comment to date on the re-proposal and industry insiders largely agree
that it is anyone's guess when the SEC will act on the re-proposal.
Form Construction
7

Part 1
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Part 1A: base form
Part 1B: required by state securities authorities
Schedule A: direct owners and executive officers
Schedule B: indirect owners
Schedule C: update information on Schedules A and/or B
Schedule D: additional information from Part 1A
Form Construction
8

Part II: Disclosure Brochure
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Schedule F: additional information (narrative) from Part II
Schedule G: balance sheet
Schedule H: wrap fee programs
Part 2?
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Part 2A: disclosure for the firm
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Appendix 1: wrap fee program brochure
Part 2B: disclosure brochure supplement for IA personnel
Who are “You”?
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Who are your “employees”?
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Who are your “clients”?
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Do your services qualify as AUM?
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Continuous and Regular Supervisory or
Management Services
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CRITERIA
You have discretionary authority over the account and:
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you provide ongoing supervisory or management services with respect
to that account.
You do not have discretionary authority over the account but:
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you have ongoing responsibility to select or make recommendations;
based upon the needs of the client;
as to specific securities or other investments the account may
purchase or sell; and
if such recommendations are accepted by the client, you are
responsible for arranging or effecting the purchase or sale.
Continuous and Regular Supervisory or
Management Services
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FACTORS
Terms of the advisory contract.
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If your advisory contract provides for ongoing management services,
this suggests that you provide these services for the account.
Other provisions in the contract, or your actual management practices,
however, may suggest otherwise.
Form of compensation.
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Compensation based on the average value of the client’s assets you
manage over a specified period of time suggests continuous and
regular supervisory or management services for the account.
Compensation in a manner similar to either of the following suggests
you do not provide continuous and regular supervisory or
management services for the account:

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Compensation based upon the time spent with a client during a client visit;
or
A retainer based on a percentage of assets covered by a financial plan.
Continuous and Regular Supervisory or
Management Services
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
FACTORS
Management practices.
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The extent to which you actively manage assets or provide advice
bears on whether the services you provide are continuous and regular
supervisory or management services.
Making infrequent trades (e.g., based on a “buy and hold” strategy)
does not mean your services are not “continuous and regular.”
Continuous and Regular Supervisory or
Management Services
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APPLICATIONS
 have
discretionary authority to allocate
client assets among various mutual
 provide
market timing recommendations
(i.e., to buy or sell), but have no ongoing
 do
not have discretionary authority, but
provide the same allocation services,
 provide
only impersonal investment
advice (e.g., market newsletters);
funds;
and satisfy the criteria set forth in the
foregoing discussion;
 allocate
assets among other managers (a
“manager of managers”), but only if you
have discretionary authority to hire and
fire managers and reallocate assets
among them; or
 you
are a broker-dealer and treat the
account as a brokerage account, but only
if you have discretionary authority over
the account.
management responsibilities;
 make
an initial asset allocation, without
continuous and regular monitoring and
reallocation; or
 provide
advice on an intermittent or
periodic basis (such as upon client
request, in response to a market event,
or on a specific date (e.g., the account is
reviewed and adjusted quarterly)).
What else are “you” doing?
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Who are “you” related to…?
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…and is it “material”?
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Are they talking about me?
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Do you have “custody”?
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Custody for SEC Advisers
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
Definition of custody:
“Adviser has custody when it holds, directly or indirectly, client funds
or securities, or has any authority to obtain possession of them.”
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In order to ensure compliance with SEC custody rules, the
following factors must be addressed:
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Qualified Custodian
Notification
Quarterly Statement
SEC Examples of Custody
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Possession of client assets unless the adviser returns them
within 3 business days.
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Securities
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Funds (can forward checks payable to 3rd parties)
Acts in any capacity that gives it legal ownership of, or access
to, client funds or securities.
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General partner of a client (hedge fund, family limited partnership, etc.)
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Trustee of a client trust
Authority to withdraw assets from a client’s account.
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Sign checks, withdraw assets, dispose of clients assets for any purpose
other than authorized trading activity
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Authority to deduct advisory fees or other expenses directly from client’s
account
SEC Custody Compliance
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Qualified Custodian
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Advisor must maintain client funds and securities at a “Qualified
Custodian.”
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Exemptions
Notification
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Each client must be:
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notified, in writing, that the custodian is holding the funds
provided with information so that the client can contact the custodian
Quarterly Statement
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The adviser must have a reasonable belief that Qualified Custodian
delivers quarterly account statement directly to the client.

Adviser may still maintain the responsibility for delivering statements if it
remains subject to the surprise audit from an independent CPA.
The Look of Custody for SEC Advisers
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
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Consistent, concise definition of custody and compliance
requirements.
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Adviser need not send statements
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No more surprise audits
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No more audited balance sheet and disclosure to clients
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No more need to read through numerous no-action letters
Almost every investment adviser now has custody.

SEC will amend the instruction Form ADV so advisers that have custody
only because they deduct fees may still answer “no.”
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However, if you state in any of your documents, such as Part II of Form
ADV, client agreements, marketing materials, etc. this must be changed.
State advisers remain held to higher standards.
SEC Proposed Revisions to the Custody Rule
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
Market Scandal Driven
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In response to recent high profile scandals, the SEC has proposed to
modify the custody rule:
 Annual Independent Custody Audit
 ADV-E
 SAS-70 Audit
The proposed rule does not appear to impact ADV disclosure
Custody Compliance for State Advisers
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
What are the states’ custody rules?
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States that have not acted continue to rely upon repealed SEC
No-Action letters.
NASAA’s model rule imposes higher standards for state
advisers debiting fees than corresponding the SEC rule.
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Some states follow the SEC’s custody rule.
Others follow NASAA’s model rule.
Others have adopted their own rules or have not yet acted.
Must send a copy of their invoice to the client at the same time it is
sent to the custodian.
Disclosure on Form ADV for all state advisers
Small Businesses Omit the Small Business
Section
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Ulterior Motives of Financial Planning
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Will the real sole proprietors please stand
up?
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Is this math correct?
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Where did everybody go?
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The 20th Century Form ADV
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The 20th Century Form ADV
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The 20th Century Form ADV
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Code of Ethics
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Code of Ethics
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SEC advisers must adopt and enforce a written code of ethics
and include this as disclosure in Schedule F.
Not all states have adopted rules requiring Code of Ethics, but
some require that it appear in Schedule F.
NASAA Model Rule 102(a)(4)-1 prohibits investment advisers
from unethical business practices, but it never adopted a
“Code of Ethics”, instead stating in a letter to the SEC that a
laundry list of unethical business practices would better
ensure compliance with an adviser’s fiduciary duties.
Filing Part II Online
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
IARD system is designed to accept an upload of an adviser’s
ADV Part II.
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Virtually all states require their state registered advisers to upload ADV
Part II to IARD.
SEC registered adviser have the option but not the obligation
to upload ADV Part II.
The re-proposed ADV Part 2 would be completed on the IARD
system or be required to be uploaded.
Form ADV Part 2
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Part II
Part 2
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Check the box & written narrative
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Written narrative only
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Redundancy with Part 1
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Less redundancy
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Lack of clarity on where to disclose certain
information
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Clearer disclosure requirements
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Delivery to clients on the onset of the
relationship
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Delivery within 120 days of the adviser’s
fiscal year end, and delivery of an interim
update to clients when the brochure is
amended to add a disciplinary event or
there is an otherwise material change

Inclusion of a brochure supplement for
each supervised person who (1) formulates
investment advice for that client and has
direct client contact or (2) makes
discretionary investment decisions for the
client’s assets, even if that person has no
direct client contact.
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Required submission of Form ADV Part 2
through IARD
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Delivery to clients on the onset of the
relationship
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Annual offer to deliver
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Certain adviser representatives or
members of the Investment Committee
listed in Item 6
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No requirement for submission of Form
ADV Part II
Designation of a Chief Compliance Officer
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
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Every SEC-registered investment adviser (and arguably also
state-registered advisers) must appoint a Chief Compliance
Officer (“CCO”).
Schedule A of Form ADV now implies that a CCO be listed for
all investment advisers.
Many states have formally adopted similar requirements.
Some states have not yet adopted rules requiring a CCO be
named on Schedule A, but have cited it as a deficiency.
Wrap Fee Programs
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
A wrap program is:
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Investment advisers that sponsor wrap fee programs must
deliver a brochure meeting the requirements of Schedule H
of Form ADV in lieu of their Form ADV Part II or equivalent
disclosure document.
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“a program under which any client is charged a specified fee or fees;
not based directly upon transactions in a client's account;
for investment advisory services (which may include portfolio
management or advice concerning the selection of other investment
advisers); and execution of client transactions.”
Schedule H acts as the table of contents for a written narrative brochure
that reads like a mix of Schedule F of Form ADV and a mutual fund
prospectus.
Clients that have two relationships (one in which transaction fees are
included in the adviser’s fees and one in which transaction fees are
separate) may have to get both Form ADV Part II and the wrap brochure.
This also must be disclosed on Form ADV Part 1.
Brian S. Hamburger, JD, CRCP, AIFA®
42
Brian Hamburger is the Founder and Managing Member of the Hamburger Law Firm. Brian is also the Founder and Managing Director of MarketCounsel,
affiliated business, regulatory, and compliance consulting firm for entrepreneurial investment advisory firms nationwide. MarketCounsel and the Hamburger
Law Firm are the result of an incessant entrepreneurial spirit and genuine desire to provide an unexpected level of value and service. Together, the
consulting and law firms represent an unparalleled combination of preeminent counsel and uncompromising service to the retail securities industry.
an
Previously, Mr. Hamburger was an attorney with the securities practice group of a large New Jersey law firm. While there, he practiced in the area of
securities law, concentrating in investment adviser and broker-dealer registration and compliance matters as well as broker transition and practice
management issues. Prior to that post, Brian served as a law clerk in the Enforcement Division of the U.S. Securities & Exchange Commission. He was
also a judicial intern at the U.S. District Court for the Southern District of Florida and then, the State of Florida Third District Court of Appeal. Earlier, Brian was the chief
compliance officer of an SEC-registered investment adviser. In addition to his father's lifelong influence, Brian’s involvement in the securities industry started before he could
even drive a car. Since then, he has been involved in a myriad of areas within the industry, posting a rich diversity of experiences with investment adviser and financial planning
firms.
Mr. Hamburger is admitted to the bars of New Jersey, New York, Pennsylvania, Massachusetts, the District of Columbia, as well as the U.S. Supreme Court. He is a member of
the American Bar Association (Business Law Section) and other bar associations; the Securities Industry and Financial Markets Association, Compliance & Legal Division;
National Society of Compliance Professionals; Financial Planning Association; and Society of Financial Service Professionals. Brian has been appointed to the American Bar
Association’s Committees on Federal Regulation of Securities; State Regulation of Securities; and Professional Conduct; and is a Platinum and Gold Key Member of the New
York Chapter of the Investment Management Consultants Association and New Jersey Financial Planning Association, respectively. He has also heeded the call of the Certified
Financial Planner Board of Standards to sit on various task forces to shape industry-wide initiatives.
Brian is a frequent lecturer to regional and national groups in the securities industry including members of the wealth management, investment management, financial planning,
accounting, and insurance professions. His forums have ranged from delivering the keynote address to the country's state securities regulators to addressing school-age
children on career and entrepreneurial issues. For the past several years, he has been engaged by the North American Securities Administrators Association (NASAA) to train
state securities examiners on the intricacies of Form ADV and investment adviser client contracts. Mr. Hamburger proudly sits on several boards of directors and advisory
boards. He maintains his FINRA securities licenses (Series 7, 63 and 65), is a member of the FINRA Dispute Resolution Board of Arbitrators and served as an arbitrator for the
New York Stock Exchange.
A graduate of Quinnipiac College, Mr. Hamburger received his B.S. with the school's first dual major in Economics and Financial Management. He went on to earn his Juris
Doctor from the University of Miami School of Law where he was the recipient of a Dean’s Service Scholarship and the President's Pinnacle Award for his role as Editor-in-Chief
of the Res Ipsa Loquitur, the Bi-Weekly Journal of the University of Miami School of Law. Brian was among the first to earn the designation of Certified Regulatory and
Compliance Professional (CRCP) by the Wharton School and the FINRA Institute after completing his residency at the Wharton School of the University of Pennsylvania. He
was recently awarded the Accredited Investment Fiduciary Analyst™ (AIFA®) designation by the Center for Fiduciary Studies. AIFA designees have the knowledge necessary to
understand and implement a prudent investment process for investment advisers, investment managers, and investment stewards and can perform a fiduciary assessment to
verify or certify an entity's conformity to a "global fiduciary standard of excellence.“Brian is an active member of the US Coast Guard Auxiliary. He lives with his wife, Kari, their
daughter, Ella, and sons, Jacob and Sidney, in New Jersey.
© 2009 MarketCounsel, LLC. All rights reserved.
No portion of this presentation may be reproduced without the express written consent of the author.
MarketCounsel is a consulting firm, is not affiliated with any government entity, and does not render legal or investment advice.
MarketCounsel is affiliated with the Hamburger Law Firm, LLC.
201.705.1200
www.marketcounsel.com
Speaker
Contributors
Brian S. Hamburger, JD, AIFA ®, CRCP
Robert J. Seco, JD