Ways to Avoid Disclosure Violations



Tracking Regulatory Compliance Disclosures

With the growing number of items that compliance teams must monitor, including both firm and representative disclosures, tracking regulatory compliance disclosures has become even more complicated than it used to be. This aspect of the financial services industry probably isn’t the most exciting, but it’s critically important to get right. 

Investment advisors, specifically, must make available or proactively provide more information to clients than in the past, and the data must be up to date. Every change, from contact information to certifications and professional designations, as well as certain legal infractions, must be tracked and disclosed to clients. Much of this information also needs to be filed and maintained with the Securities and Exchange Commission and state regulators. Failure to do updates promptly, or keep disclosure documents consistent with information on file with regulators, can lead to disciplinary or enforcement actions that can have detrimental impacts on both the firm and individuals involved. 


Official Documentation

For example, investment advisors must present two detailed documents to clients before a client relationship can begin and during the relationship if anything changes with the firm or the advisor. Officially known as Form ADV Part 2A and Form ADV Part 2B, these digital or printed disclosures are statutorily required to provide information in plain language about the firm and the representatives providing advisory services to the client.  

These mandatory forms, also known as brochures, deliver information regarding the services offered by the firm and the individuals providing the service including, among other things, potential conflicts of interest and disciplinary history. 

Creating these forms on demand isn’t difficult for smaller firms with a handful of representatives, but it becomes much more difficult for larger firms – an increasingly common issue as industry consolidation continues. Automation enables firms to create and manage these disclosure documents and maintain the required data more efficiently. 


Detailed Information

According to industry regulations, a client must receive an updated version of the disclosure forms any time there’s a material change to the information. 

While Form ADV Part 2A covers the firm, Part 2B is for each representative. Information on Part 2B includes education, experience and any disciplinary history within the last 10 years (or longer for some types of events). Disclosable events include regulatory fines or infractions, civil or criminal actions, and any legal or disciplinary event that is material to a client’s evaluation of the representative’s integrity. Given these parameters, even a DUI from 10 years ago would need to be disclosed.  

If a firm employs a team approach, the client must receive a Part 2B disclosure from everyone providing advice on their account and receive disclosures when any team member or other material detail changes.



By employing an intelligent brochure creation tool augmented with direct feeds of any of their representatives’ data filed with the SEC or the Financial Industry Regulatory Authority Inc., a firm can automate the process of disclosure form creation so that whenever a copy of the form is requested from the system by a representative, the data can then be automatically placed into their brochure template, allowing firms to print or provide digital disclosures on demand, with the certainty the information within is up to date. 

For firms that don’t have a dedicated compliance officer or supervisor and firms with a large number of representatives distributed in many locations, automation alleviates the burden of ensuring that all individuals’ disclosure brochures are always up-to-date when provided to prospects or clients.


New Requirements

Thanks to regulatory enhancements in the wake of the financial crisis, the industry saw a wave of new disclosure requirements, including Form ADV Part 2B. We may see another tidal shift as regulators, the SEC in particular, execute on an ambitious agenda of new regulations — more than 30 in the last year have been proposed by the SEC and many include some form of additional disclosures. As each of these new regulations is approved and implemented, firms may be faced with the challenge of updating all of their existing disclosure documents to incorporate new requirements. 

As we look to a future with ever-increasing disclosure requirements, the need for simplified and efficient disclosure becomes significantly more important. Automating this process with the right technology partner is critical for any firm looking to maintain growth and compliance. 

The Form ADV Part 2A and Part 2B examples represent the tip of the iceberg regarding the potential of automation for regulatory compliance documentation. Firms that embrace this technology create an environment that allows their compliance teams to focus on the bigger picture and high-risk areas facing their firms while still fulfilling their day-to-day compliance obligations. By alleviating the time-consuming burden of complying with disclosure requirements, firms can free resources to deliver greater value to their clients.


RiXtrema offers a wide range of financial tools to our clients. Our Portfolio Crash Testing (PCT) tool helps financial advisors determine the best way to adjust clients’ portfolios to reflect their values and needs. You can learn more about our products and services on our website www.rixtrema.com and sign up for a free trial for any of the tools.

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