Form ADV Part 2B Overview (tested on the Series 63, 65, 66)

Tyler York

Form ADV Part 2B is an important form that investment advisers use to make disclosures. The use of this form is tested on the NASAA Series 63, 65, and 66 exams. In this video, we go over the form’s contents, how it is used, and walk through a practice question that you might see on the exam.

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Full Form ADV Part 2B Overview (tested on the Series 63, 65, 66) video transcript:

Form Adv. Part 2B is known as the brochure supplement. This is the part of form adv that discloses background information on the personnel that work for investment advisor firms. Specifically investment advisor representatives that either have client facing roles where they work directly with clients or investment advisor representatives that maintain discretionary authority over client assets. So for example, that could be someone that works in the back office doesn't meet with.
Clients but manages their accounts on their behalf on a discretionary basis. And by the way discretionary means the client has given power of attorney to the firm or the investment advisor representative which gives them the ability of making investment choices and trades on their behalf without getting their explicit approval prior to each transaction. Discretionary accounts are great for investors that just want to give complete control to their advisors and forget about the investing and there are a lot of investors out there that like that type of relationship.
Disclosure is a really important part of the investment advisor's business. While form ADV Part 2 a the brochure is the disclosure document related to the firm. This is the disclosure document that goes over. Hey, here are the employees of the firm that are giving you advice, selling you investment advisor products, so forth. Before we talk about the specific components of the brochure supplement, here's what I would encourage you to do. Assume that you have an investment advisor representative that is assigned to manage your account. What are the.
The things that you would want to know about them, about their background, about what they do in the industry, if they have any kind of disciplinary history or criminal history, these are the things that are in the brochure supplement. Let's go ahead and cover the specifics first.
Educational background is something that is disclosed on the brochure supplement. This is actually a pretty interesting test point because educational background most of the time is not something that we care too much about. We generally don't care about educational backgrounds, but clients, whether they have a high school diploma, no high school diploma or a doctorate, we generally speaking don't really care about that. We care more so about their asset level, their risk tolerance, their time horizon. So it doesn't matter there. It also does.
Doesn't matter when you register as an agent or an investment advisor representative, you don't have to disclose whatever educational background you have. Now of course, that might get wrapped up into a disclosure. For example, if I was just recently a fulltime student prior to registering, say as an agent, I would have to disclose my background there because I am responsible for disclosing 10 years of employment history. But in general, if I'm 10 years removed from my school experience, do I have to disclose any of that on forming?
You for No I don't. So again, educational background is usually something that's just not important. But one place that we care about on the exam where it is important is form 80V, part 2B. Any type of educational background that an investment advisor representative has is going to be placed in the brochure supplement. Business experience is also disclosed. What type of firms has the investment advisor representative work for in the past? Have they just exclusively worked at this company?
Do they bounce around company to the company, etc? That's the type of information that's disclosed in this section of the brochure supplement. Next is disciplinary information, just like the firm discloses this type of information at a company level On formula DV Part 2 way, investment advisor representatives will disclose disciplinary information related to them specifically on the brochure supplement in this section. This includes any kind of criminal, civil or regulatory events where things were ruled against them. This could include.
Include their registration being suspended in the past or maybe they have some type of criminal history that needs to be disclosed to clients. If that type of background exists, it's going to be disclosed in this part of the brochure supplement. Next is outside business activities. This section will disclose any type of compensation that the investment advisor representative receives outside of working for the firm. For example, if the representative is in a band and they get paid to play gigs around town or if they drive Uber on the weekend.
When they're not working at the firm, that type of information is disclosed here. And last is additional compensation. Now this might sound similar to outside business activities, but additional compensation is within the firm. And this is anytime the representative is receiving any type of money above and beyond what their clients pay them. So for example, an investment advisor representative is paid a Commission by an insurance company to sell their variable annuities to their own clients. That would be an example.
Of additional compensation, which is arguably a pretty big conflict of interest. And as you already know from the achievable materials, conflicts of interest can exist as long as they're properly disclosed and the impact to the client is minimized as much as possible. Those are the primary components of forming DV Part 2B. Now let's go ahead and take a look at a practice question and see how we might be tested on this topic. All right, questions on the board, A client receives the brochure.
And its supplement when opening an account and an investment advisor, all of the following circumstances must be disclosed in the brochure supplement except, OK, go ahead and take a second. Pause the video, see if you know the answer and we'll go ahead and reconvene. Talk about it together here in just a moment.
Okay, let's see if you know the answer. We are looking for the circumstance that is not required to be disclosed on the brochure supplement. First answer, an investment advisor representative operates a side business on the weekends. Yes, this has to be disclosed. This would fall into the outside business activity section if we're making any type of money outside of the company we work for, even if it's just mowing lawns for your neighbors for 20 bucks a lawn, that has to be disclosed on the brochure supplement.
Next, 12B1 fees shared with investment advisor representatives upon the sale of specific securities. This falls into the additional compensation section of Form ADV Part 2B. If an investment advisor representative is being paid any additional compensation above and beyond what their clients pay them for the services they provide, that's got to be disclosed in the brochure supplement as well. Again, that's a conflict of interest. Got to tell our clients about it. This is where it goes.
O That is definitely not going to be the answer. Let's go to the third one, prior suspension imposed on an investment advisor representative, but by another state's administrator, HM.
OK, we know that suspensions, revocations, criminal history, basically the disciplinary history related to the investment advisor representative has to be disclosed on this form. Maybe the only confusing part is it's from another state's administrator. But here's the thing, it doesn't matter. You could be in Florida and disclose how the Hawaii state administrator revoked your license. That would have to go on the brochure supplement. On top of that, any type of disciplinary history.
Related to a foreign regulator also typically has to be disclosed in this form as well. So it doesn't matter what type of securities regulator we're talking about, if there's a history of discipline there, we got to disclose it on the brochure supplement. So this is going to be a wrong answer as well. That leaves us with the last answer. This is likely going to be our answer here. And let's just double check and make sure. The investment advisors EIN, If you don't know what the EIN is, this is the Employer Identification Number, which is basically the Social Security.
Number for a business and this is very much for the investment advisor, this is information that's disclosed on Form ADV Part one. This doesn't really go to clients nor do clients really care about this information. And also you got to remember Form ADV Part 2B is a personnel document focused on investment advisor representatives. It's not going to have much disclose there about the firm they work for. That is either going to be Form ADV Part one or Form ADV Part 2 A. So if you feel confident that.
The brochure supplement was investment advisor representative focus. You could probably reason yourself to this being the right answer because this is just information that doesn't go here and it does kind of stick out in terms of test taking skills. The 1st 3 answers we went through were all investment advisor, representative, investment advisor, representative, investment advisor representative. The last one was investment advisor. Small little difference and you have to know your material to feel confident when you're answering something like this, but that is definitely the odd one that sticks out.
And that is going to be our correct answer.
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