DRP – Disclosure Reporting Pages, those words send shivers down our spines. What are they exactly? What are the used for? What information is required?
What are they exactly?
DRP’s are sections of three different regulatory forms used in the financial industry to provide information to the public and/or to regulators about specific: criminal, civil, and regulatory actions; customer complaints; bankruptcies; judgments; and, liens.
- The Form ADV is used to register with the SEC and/or various state jurisdictions as an investment adviser.
- The Form U4 is used to register an individual as a Registered Representative of a Broker/Dealer and an Investment Adviser Representative of a Registered Investment Adviser.
- The Form BD is used to register with FINRA and/or various state jurisdictions as a broker/dealer. This blog will not address details regarding the Form BD.
What are they used for?
While the questions vary slightly from form to form the essence of what is requested is to gather information as the “first line of defense” for investors and regulators in their efforts to prevent dishonest/unethical business practices or fraud. (Excerpt form NASAA – Informal Guidelines to Completing Registration Forms). NASSA goes on to offer the following: “Regulators act as professional skeptics, on behalf of the citizens of their states, when examining applications for registration and post registration amendment filings.”
What information is required/disclosed?
The Form ADV Part 1A requests information about the adviser, and any advisory Affiliates. An Advisory Affiliate is defined as 1) all current employees (other than clerical); 2) all of officers, partners, or directors (or other person performing similar functions); and 3) all person directly or indirectly controlling the adviser, or controlled by the adviser.
The information required to be disclosed relates to:
- Any felony arrests and convictions;
- Misdemeanor charges or convictions involving investments or investment related business, or any fraud, false statements, or omissions, wrongful taking of property, bribery, perjury, forgery, counterfeiting, extortion, or conspiracy to commit any of these offenses;
- Incidents involving the Securities and Exchange Commission (“SEC”) or the Commodity Futures Trading Commission (“CFTC”);
- Incidents involving any federal regulatory agency, any state regulatory agency, or any foreign financial regulatory authority;
- Incidents involving any Self-Regulatory Organization or Commodities Exchange;
- Revoked or suspended authorization to act as an attorney, accountant, or federal contractor; or
- Investment-related domestic or foreign civil matters.
If the firm is State registered the following additional information is required to be disclosed on the Form ADV Part 1B.
- Bonding Company denial of, paid out on, or revoked bond;
- Unsatisfied Lien/Judgements;
- Arbitrations claiming damages of $2,500; or
- Additional Information on investment related matters in any Civil, Self-Regulatory, or Administrative proceeding.
For each of these items, the DRP page requires disclosure of various pertinent information such as relevant dates, the allegations, the disposition, the amount of any fines, judgments or awards, other disciplinary sanctions imposed as well as offering you the opportunity to briefly state your own position regarding what happened.
The Form U4 requests specific information regarding an individual’s disclosures. The information disclosed on the form pertains to:
- Charges or convictions of a felony;
- Charges or convictions of a felony for activities that occurred in an organization that the individual exercised control over;
- Misdemeanor charges or convictions involving investments or investment related business, or fraud, false statements or omissions, wrongful taking of property, bribery, perjury, forgery, counterfeiting, or a conspiracy to commit any of these offenses;
- Incidents involving the SEC or CFTC;
- Incidents involving a federal regulatory or state regulatory agency, or foreign financial regulatory authority;
- Incidents involving state authorities that supervise banks, savings associations, or credit unions, state insurance commission, federal banks agency or National Credit Union Administration;
- Incidents involving any self-regulatory organization – defined as “Any national securities or commodities exchange, any national securities association (e.g., FINRA), or any registered clearing agency.”
- Revocation or Suspension of authorization to act as an attorney, accountant or federal contractor;
- Any written regulatory complaint or proceeding that could result in a yes answer to any questions regarding the SEC, CFTC, Federal or State Regulatory Agency, or Self-Regulatory Agency including FINRA;
- Investment Related Civil actions brought by a domestic or foreign court;
- Investment-Related, Consumer-Initiated Arbitration or Civil Litigation that has named the individual alleging violations of one or more sales practice violations and which ; a) is pending; b) has resulted in an arbitration award or civil judgment against the individual regardless of the amount; or c) was settled prior to 5/18/2009 for $10,000 or more or after 5/15/2009 for $15,000 or more;
- Investment-Related, Consumer-Initiated Customer Complaint (written or oral) that alleges violations of one or more sales practices and; a) was settled prior to 5/18/2009 for an amount of $10,000 or more, or; b) was settled on or after 5/18/2009 for an amount of $15,000 or more;
- Investment-Related, Consumer-Initiated written complaint (not otherwise reported) that; a) alleges involvement in one or more sales practices violations and contained a claim for compensatory damages of $5,000 or more (note: if no damages were alleged, the complaint must be reported unless the firm has made a good faith determination that the damages from the alleged conduct would be less than $5,000), or; b) alleged that you were involved in forgery, theft, misappropriation or conversion of funds or securities;
- There are additional questions that must be completed regarding arbitration claims or civil litigations if the allegations were filed on or after 5/19/2009;
- Terminations for Cause: Voluntary resignation, discharged or permitted to resign after allegations were made that accused the individual of violating investment-related statutes, rules or industry standards of conduct, fraud or wrongful taking of property, or failure to supervise;
- Bankruptcy disclosure – personal or corporate and/or appointment by Securities Investor Protection Act (SIPC) within the last 10 years;
- Denial of, payment made on, or revocation of a bond by a bonding company; or
- Any unsatisfied judgements or liens.
As with the ADV Part 1, for each of these items, the DRP page requires disclosure of various pertinent information such as relevant dates, the allegations, the disposition, the amount of any fines, judgments or awards, other disciplinary sanctions imposed as well as offering you the opportunity to briefly state your own position regarding what happened. However, where the individual is also an Advisory Affiliate of an investment adviser, it is possible to reference the individual’s Form U4 DRP information on the Form ADV which limits duplication of information.
It is obvious that the Form U4, requires the widest scope of disclosure. Most of the information on these regulatory forms is available to the public either through FINRA’s Broker/Check or the SEC’s Investment Adviser Public Disclosure site – IAPD. Disclosing information on these documents is much easier than attempting to remove or change it, therefore it is imperative that you seek competent legal advice with respect to what is required to be disclosed, and the correct wording of the disclosure.
Finally the Form ADV Part 2A and Part 2B requires that certain disciplinary information be disclosed in a narrative as part of your obligation to disclose events that are material to a client or prospective client’s evaluation of the firm’s advisory business or the integrity of its management.
The SEC requires specific legal and disciplinary events that occurred in the past 10 years regarding the following to be disclosed in Item 9 of the Form ADV Part 2A:
- a criminal or civil action in a domestic, foreign or military court;
- an administrative proceeding before the SEC, and other federal or state regulatory agency or any foreign financial regulatory authority; or
- a self – regulatory proceeding.
Part 1B of the Form ADV which is required only of state registered investment advisers requires additional disclosure in Item 19 of the Form ADV Part 2A.
- Disclosure of an award or being found liable in an arbitration claim (certain circumstances apply); or
- Disclosure of an award or being found liable in a civil, self-regulatory organization or administrative proceeding involving certain specific charges.
The Form ADV instructions also indicate that the referenced items are not considered to contain an exclusive list of material disciplinary events. It is incumbent on the firm to evaluate, and if necessary disclose, any event that is material to a client or prospective client’s evaluation of the firm’s business or the integrity of its management. That means that the firm or its advisory associates may have been involved in an incident that does not apply to the specific list of events discussed above, but because of the nature of the incident it could be material to the firm’s client’s decision to use the firm. That may include an event that occurred more than 10 years ago, but because of its serious nature, it may remain material in the firm’s efforts to be totally transparent to its clients. The instructions go on to say that even if something is material to a client or prospective client, you may be able to rebut the presumption that it has to be disclosed under certain circumstance. In that event, you need to make and keep a memorandum explaining how you arrived at that decision. The failure to maintain such a memorandum could, itself, wind up being a violation that causes you to incur a disciplinary sanction so it’s important that you follow the instructions carefully. Similar information is required to be disclosed in the individual Form ADV Part 2B Brochure Supplement.
At all times an investment adviser has a duty to provide any and all information that is material to a client of the firm. Seeking good counsel on proper disclosure is the first line of defense to ensure that you have proper disclosure documents.
Jennifer Aracri can be reached at NCS Regulatory Compliance by calling 561-570-1812 or by e-mail at firstname.lastname@example.org.
NCS Regulatory Compliance has been assisting broker-dealers and investment advisers with industry critical compliance responsibilities for over 25 years. We continue to provide products and services to thousands of firms in the financial services industry. If you have questions related to compliance obligations, compliance requirements, or other compliance topics, please contact us at 800-800-3204 or email@example.com.