The soon-to-be-implemented general instructions for Form ADV Part 3 dictate that it must include “disclosures for any of your financial professionals in Items 14 A–M on Form U4.” So, while these investor disputes are no longer reportable on an advisor’s ADV Part 1A and Part 2A, because advisors must still report the events on their Form U4, these items will have to be reported to ADV Part 3.
Form U4, specifically in question 14I(1)(b), requires disclosure when an advisor was named as a respondent in the customer dispute with allegations of sales-practice violations in cases where a FINRA arbitration panel awarded a judgment against the financial advisor.
Question 14I(2)(a) of Form U4 requires disclosure for advisors who have ever been the subject of an investment-related, consumer-initiated complaint, which alleged that they were involved in one or more sales-practice violations and was settled for $10,000 or more prior to May 18, 2009 or $15,000 or more after May 18, 2009.
For the purposes of illustration, let’s consider an advisor whose BrokerCheck and IAPD profile includes two separate customer dispute disclosures: one from 1991 and one from 1997.
Settled Customer Dispute from 1991
The customer complaint disclosure from 1991 is an investor dispute claiming damages of $140,000 that went to arbitration. The advisor’s client alleged several sales-practice violations, and it ultimately concluded in a full award judgment of $33,000 against our financial advisor and two others. Our advisor was liable for $3,000 of that amount, and the other two respondents were liable for the remaining $30,000. No findings were entered regarding any causes of action on our advisor’s part.
Settled Customer Dispute from 1997
This same advisor’s 1997 initial complaint alleged damages over $250,000 with investor allegations of excessive margin trading and breach of fiduciary duty. The broker-dealer settled on behalf of the financial advisor in the amount of $200,000, with our advisor contributing $10,000.
Form U4 vs. ADV
The 1991 customer dispute that went through FINRA arbitration is not reportable on the advisor’s ADV Parts 1 or 2, because it’s over ten years old, and there were no findings of conduct violations on the part of the financial advisor. However, the FINRA arbitration case must be reported to Form U4, as Form U4 14I(1)(b) only requires an advisor to be named as a respondent with allegations of sales-practice violations in which a FINRA arbitration panel awarded a judgment against the advisor. Thus, because our financial advisor was named as a respondent, because the underlying arbitration alleged multiple sales-practice violations, and because the arbitration panel awarded a judgement against the advisor, the customer dispute disclosure must be reported on Form U4.
The 1997 customer dispute is not reportable on Form ADV Parts 1 or 2 for multiple reasons, primarily, because it was merely an investor complaint and did not involve a judgment, as well as the fact that ten years have passed. However, Form U4 still requires disclosure, because the complaint alleged a sales-practice violation and was settled for an amount in excess of the $10,000 threshold for reporting client disputes from that time.
Despite the fact that neither investor complaint is reportable to existing ADV Parts 1 and 2, both customer disputes in our hypothetical example will now be reportable to the new ADV Part 3, due to its requirement to report such events from financial advisors’ Forms U4.
If the application of these new rules in determining what should and should not be disclosed seems tricky to navigate—don’t worry—relief is available. AdvisorLaw can do all of the compliance heavy lifting for you and make sure that your ADV Part 3 or Form CRS will stand up to an audit.
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