IA Compliance:
Disclosing Outside Business Activities
The following information reflects the views of NASAA’s Investment Adviser Section Resources and Publications Project Group. It does not necessarily represent the views of NASAA, and it is not intended as legal advice. Any questions should be directed to the appropriate state regulators.
As fiduciaries, advisers have a duty of loyalty to eliminate or make full and fair disclosure of all conflicts of interest resulting from outside business activities. Advisers who engage in an outside business activity (“OBA”) must disclose information pertaining to OBAs on several required regulatory forms. This article will focus on where disclosures may be required on the Form U4 and Form ADV Parts 1 and 2 to ensure compliance and consistency. Instructions for each form along with a glossary of terms are available in the NASAA Uniform Form Library.
Form U4
The Form U4 is the individual representative’s registration application, which requires routine review and regular updates to incorporate any changes. Specifically, Section 13 of the Form U4 requires disclosure of the other businesses being conducted, including the representatives’ duties, location, nature of the business, including whether it is investment-related, and the number of hours devoted. The OBA disclosures on the Form U4 must be consistent with the disclosures made throughout the Form ADV.
Form ADV
There are multiple places on the Form ADV where OBAs may need to be disclosed. The Form ADV Part 1 requires information about the adviser’s business, clients, employees, affiliations, and any disciplinary events primarily used by regulators. The Form ADV Part 2 is a narrative, plain language brochure that explains the adviser’s business practices, fees, conflicts of interest, and disciplinary information to clients. Advisers should ensure clients acknowledge receipt of the Form ADV Part 2. It is important for the adviser to ensure the disclosures in both documents are consistent and accurate. In this section, we will break down the two main types of information required to be disclosed on the Form ADV and where to find them.
OBAs that are Investment-Related
If the adviser or any related persons sell products or services, directly or indirectly to clients, or participate or have interest in client transactions, disclosures may be required in the following sections:
- ADV Part 1A Item 5 B (2),(4), and (5);
- ADV Part 1A Item 5 E (5) and (7);
- ADV Part 1A Item 6;
- ADV Part 1A Item 7;
- ADV Part 1A Item 8;
- ADV Part 2A Item 5 E;
- ADV Part 2A Item 10 A- D; and
- ADV Part 2A Item 11.
OBAs Not Included in Advisory Services
In addition to providing advisory services, advisers may offer non-advisory services such as insurance, accounting, or brokerage services. OBAs include activities conducted within or outside of the advisory firm, as well as OBAs conducted by any related person, as defined in the Form ADV glossary.
The following Form ADV sections seek information regarding OBAs or ventures not included in advisory services:
- ADV Part 1A Item 5 B(2) and (5);
- ADV Part 1A Item 7 A and Schedule D;
- ADV Part 1A Item 8 A(3);
- ADV Part 1A Item 8 B(1) – (3);
- ADV Part 1B Item 2 G(1)(2);
- ADV Part 2A Item 10 A – D and Item 19 B and E; and
- ADV Part 2B Item 4.
Lastly, the adviser should consider addressing any OBA in their contract with clients, particularly if it creates a conflict of interest. In doing so, advisers may incorporate a conflict-of-interest clause that outlines possible conflicts and how they will be mitigated.
Bottom Line
There are multiple places throughout the forms where OBAs must be disclosed, each with their own purpose or functionality. Advisers should carefully review all forms routinely to ensure consistency and accuracy.
As disclosure requirements may vary across jurisdictions, this article is meant to be helpful, but not definitive on the disclosure requirements for OBAs. Please contact the applicable jurisdiction’s securities regulator with any questions regarding how to properly disclose OBAs.
