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An investment adviser must update its form ADV annually within 90 days of its fiscal year end. Additionally, the investment adviser must provide each client with an updated brochure annually within 120 days of the adviser's fiscal year end. The brochure must be provided free of charge and must provide a summary of material changes to the advisory firm, including:

• Conflicts of interest.

• Sources of recommendations.

• Location of customers' funds for advisers with custody.

• Any legal actions taken against the adviser.

• Material facts.

• Soft-dollar arrangements.

If the change to the investment adviser's business is material, it must be disclosed promptly. Of critical importance is to know what changes to the investment advisory firm are deemed material and when those changes must be disclosed. Most investment advisory firms other than small sole proprietorships are organized either as corporations or as partnerships. A material change to the ownership or control of the adviser is considered to be material and must be disclosed promptly. If the adviser is a corporation and one of the firm's major stockholders sells, pledges, or assigns its block of controlling voting shares, this would be seen as both material and as an assignment of the contract and must be disclosed promptly. If the nature of the transfer is deemed to be an assignment, the client would also have to give consent to continue the relationship. However, disclosure is not required if an officer of the corporation leaves. If the advisory firm is organized as a partnership and a major partner dies or departs from the partnership, this would be considered material and as an assignment. Therefore, the material change must be disclosed promptly, and the client must give consent to continue the advisory relationship. However, if the partnership adds or removes minority partners, these events would not be deemed material. An investment adviser may not:

• Borrow from a customer.

• Commingle customers' funds with the adviser's funds.

• Accept an order from a party not named on the account of the customer.

• Churn customer accounts.

• Make unsuitable recommendations.

• Charge unreasonable fees.

An investment adviser with custody of a customer's funds must:

• Segregate all customer funds and securities.

• Give the customer a written notice of the location of the funds.

• Establish a separate bank account for the customer's funds.

• Provide quarterly statements showing all transactions and the account status.

• Go through an annual surprise audit.


The state securities administrator may or may not allow advisers to have custody of clients 'funds. If custody is allowed, the adviser must notify the state that it has custody and adhere to all requirements relating to custody of client funds.

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