It’s That Time of Year . . . . To Update Your Advisory Agreement

It’s that time of year again when registered investment advisers are dutifully updating their Form ADV, with updates due to be filed March 31, 2019.[1] For most RIAs that recently went through or are currently going through this exercise, chances are that you stopped there. Don’t! On the heels of updating your Form ADV, it’s the perfect time to dust off your advisory agreement and make sure it is up to date. Where to start? Here are some ideas:

  • Make changes consistent with the updates made to your Form ADV: If you made material changes to Part 2A of your Form ADV, check to be sure provisions in your advisory agreement are updated to reflect those changes. The North America Securities Administrators Association issued a report in 2011 identifying the highest percentage of contractual issues in advisory agreements to be that they conflicted with the ADV. At least one state regulatory agency has advocated that advisers compare information disclosed on their Form ADV for consistency with information disclosed in their advisory agreement. An easy for instance would be comparing the advisory agreement’s fee schedule with the ADV Part 2 fee schedule.
  • Update your agreement to address changes in state law: Even as a federally registered investment adviser, state law may impact your advisory agreements. For example, your agreement likely has a choice of law clause. It’s important to keep up to date with state law changes that impact your advisory agreement and to update your agreement to address any such changes.
  • Consider OCIE’s priorities: Use the Examination Priorities of the Securities and Exchange Commission’s Office of Compliance Inspections and Examination (“OCIE”) to create a checklist of areas to focus on in reviewing your agreement. For example, this year, OCIE is hyper focused on fee and expense disclosures. Make sure your advisory agreement is up-to-date in areas of OCIE’s focus.
  • Consider news coverage on contract clauses: Yes, it’s true, sometime legal pronouncements regarding contract provisions do make front page news. For instance, there has been a consistent stream of articles from various jurisdictions about the enforceability of arbitration agreements and what needs to be included in an arbitration agreement for it to be enforceable. This precedent may require a revision to your advisory agreement’s arbitration clause.

Advisory agreements may be seen by some as one-and-done – you have a lawyer come in and draft it for you when you start your business, you use it to onboard every client, but the terms of the agreement may remain untouched year after year. Make this year be the year that changes and be sure to calendar an annual refresh to make sure your advisory agreement stays top of line.

[1] Advisers registered at the state or federal level must file this year’s required Form ADV annual updating amendment within 90 days of the firm’s fiscal year end. This generally means that firms who finalize their year as of December 31 must file on or before March 31.

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