Several years ago, when I was a registered rep for a brokerage firm, my employer sued me for money owed on a promissory note that I'd signed when I became employed with them. I wound up losing and filed for bankruptcy. I'm now applying to become registered as an investment adviser and my state has "suggested" that I may need to disclose the civil action and bankruptcy on my Form ADV. I know the bankruptcy has to be disclosed but I don't think the lawsuit my employer filed should be. Can you give me some advice?
— J.L., Nebraska
The instructions to the Form ADV Disclosure Brochure require you to disclose legal or disciplinary events that are material to a client's, or prospective client's evaluation of your advisory business or integrity. The instructions list several types of events that are presumed to be material. These include certain criminal or civil actions involving felonies (and certain misdemeanors) that you were convicted of, or pled guilty or no contest to, or that found you in violation of an investment-related statute or regulation. These events must be disclosed even if the charges are still pending. Also, if the criminal or civil action permanently or temporarily enjoined you from engaging in any investment-related activity it must also be disclosed. Other items listed include certain administrative proceedings before a regulatory agency or self-regulatory organization and certain other proceedings in which a professional designation or license was revoked or suspended and certain types of arbitration actions where you were found liable. The civil suit by your former employer seeking to recover money pursuant to a promissory note would not, by itself, fall into any of those categories.
But, don't forget the "catch-all" provision that requires disclosure of any other incident that a client, or potential client, would consider material in evaluating your business or your integrity. You will have to decide for yourself whether the employment dispute would be "material" to a client's decision to hire you. But if the state believes it is material, you may need to be prepared to argue your case. Depending on the exact nature of the allegations, the fact that your previous employer sued you may be more or less "material." As for the bankruptcy, that should be disclosed in Item 7 of the Form ADV Part 2B Supplement and Item 14K of Form U4.
I'm the managing partner of a limited partnership that owns a registered investment advisory firm. The RIA is set up as an LLC and the limited partnership is the sole member of the LLC. The Form ADV asks who the control persons are. Shouldn't that just be the limited partnership?
— B.T., Michigan
The term "control" is defined in the instructions to the Form ADV as: the power, directly or indirectly, to direct the management or policies of a person (i.e., the registered investment advisory company), whether through ownership of securities, by contract, or otherwise.
Each of the RIA's officers, partners, or directors exercising executive responsibility (or persons having similar status or functions) is presumed to control the RIA. A person is presumed to control a partnership if the person has the right to receive upon dissolution, or has contributed, 25% or more of the capital of the partnership. A person is presumed to control a limited liability company ("LLC") if the person: (i) directly or indirectly has the right to vote 25% or more of a class of the interests of the LLC; (ii) has the right to receive upon dissolution, or has contributed, 25% or more of the capital of the LLC; or (iii) is an elected manager of the LLC.
Depending on your title and responsibilities with the RIA, you could be considered to have "control" of the firm. If you have no official responsibilities to the RIA but would be entitled to distribution of 25% or more of the RIA's capital if it were dissolved, you would also be considered a control person. The ultimate question is, if you control the limited partnership, you most likely would be considered to control the RIA.
Alan J. Foxman is an attorney with the law offices of Rita G. Dew, P.A.
and a senior consultant with National Compliance Services, Inc.
in Delray Beach, Fla. He can be contacted at: this email address.