Department of Labor and Regulation

Title - Division of Securities

Avoiding Common Deficiencies Found in Investment Adviser Applications

Avoiding common deficiencies when preparing Form ADV Parts 1 and 2 and investment advisory agreements will help speed up the review of your application.

The most common errors found in an application are related to inconsistencies between Part 1, as filed on the IARD system; the new "plain language" narrative Part 2; and the investment advisory agreement/contract.

Form ADV, Parts 1 and 2

To avoid the most common deficiencies, please follow these guidelines:

  • Ensure the following:
  • The types of clients listed on Item 5.D of Part 1 match Item 7 of Part 2.A.
  • The type of compensation listed on Item 5.E of Part 1 matches Item 5 of Part 2.A.
  • The fee schedule listed in Item 5 of Part 2.A matches the fee schedule in the investment advisory agreement/contract.
  • How often fees are paid as listed in Item 5 of Part 2 matches the investment advisory agreement/contract.
  • Services marked in Item 5.G of Part 1 match the services described in Item 4 of Part 2.A.
  • Discretionary authority marked in Item 8.C of Part 1 matches the discretionary authority described in Item 16 of Part 2.A. In addition, you must discuss the restrictions or limitations imposed by your clients.

  • If you list other business in Item 6 of Part 1, discuss the other business in Item 10 of Part 2.A.
  • In part 2, do not state that you are "registered with the U.S. Securities and Exchange Commission" or "registered under the Investment Advisors Act of 1940."
  • If you are registering or registered with one or more state securities administrators and you receive more than $500 in fees per client six months or more in advance, include both the required balance sheet and financial condition disclosures for Items 18.A and 18.B of Part 2.
  • Update references in the investment advisory agreement from the "ADV Part II" to the newly adopted "ADV Part 2."

Investment Advisory Agreements

In addition, the Examiners also review and comment on the applicant's investment advisory agreement(s). To avoid deficiencies, please follow these guidelines:

  • The following items should be discussed in the agreement and should be consistent with the information found in Form ADV Parts 1 and 2:
  • A description of services to be rendered by the adviser;
  • A fee schedule;
  • Whether fees are charged in advance or in arrears;
  • How often fees are paid;
  • Whether fees are negotiable;
  • Whether fees are withdrawn from the client's account;
  • The firm's termination policy; and
  • A refund policy, if applicable.
  • The agreement must contain the provisions found in Administrative Rule of South Dakota (ARSD) 20:08:05:29(1).

  • The fee schedule in the agreement must match the fee schedule discussed in the Form ADV Part 2. Additionally, the type of compensation described in the contract must match what was described in Item 5 of Part 2.A and the form of compensation marked in Item 5.E of Part 1.
Topic
ADV I Item
ADV 2A Item
ADV 2B Item
Employees as Registered Reps  5B(2)  10A  4A 
Employees are insurance agents  5B(5)  10C  4B 
Use of solicitors  5B(6), 8H  14B    
Types of clients  5D  7   
Compensation  5E  5A 5E 10D 14  4A, 4B 
Performance Fees  5E  6, 19C    
Assets under management  5F  4 (do not have to match, but must be w/in 90 days)    
Services provided  5G  4   
Wrap Program  5I  4D, if so,  Appendix 1 is required    
Advise on limited security types  5J  4B    
Other financial business  6A  5E, 10A,10B, 10C   
Other business or services  6B  19B    
Financial industry affiliations  5B, 7A  10A, B, and/or C, 19E    
Private Fund Adviser - Please submit:
  LPA, PPM and Sub Docs
7B  4, 5, 10C    
Your interest in client trades  8A  11B, 11C, 11D    
Sales interest in client trades  8B, 5B, 7B  11B    
Discretion  8C  4, 16, 18B    
Related brokers  8D, 8F  10A, 10C    
Recommend brokers  8E  12A    
Soft dollars  8F, 8G  12A    
Receive pay for referrals  8I  10D, 14A   5 
Custody  9 15, 18B    
Disciplinary disclosures  11 9, 19D  3, 7 
Direct Owners  Schedule A  4, 19A   

Contact Us

445 East Capitol Avenue
Pierre, SD 57501-3185
Phone: 605.773.4823
Fax: 605.773.5953
email

When submitting checks to the Division of Securities, please make payable to: South Dakota Division of Securities.


Division of Securities
445 E. Capitol Avenue
Pierre, SD 57501-3185
Tel. 605.773.4823
Fax. 605.773.5953