Clear Enough? Houston Adviser Fined for Violating Plain Language Rule

Jul 10

Grove Capital Management Inc. paid a $5,000 fine and has been ordered to improve its compliance procedures after failing for eight years to use a form designed to provide disclosures to clients in plain language.

Texas Securities Commissioner Travis J. Iles on July 9 entered a Disciplinary Order against Grove Capital for failing to use the version of Form ADV Part 2 that has been required since 2011. James Grove is president of the firm.

The Form ADV is the primary disclosure document that investment advisers provide to their clients and file with both state securities authorities and the SEC. (See Form ADV: Essential Adviser Information, right.)

Prior to 2011, advisers made disclosures in a check-the-box format. The current Part 2 requires an adviser to prepare a plain English narrative brochure disclosing information business practices, fees and compensation, conflicts of interest, and other required disclosures.

Grove Capital had never updated its Part 2 brochure. From 2014 to August 2018, the firm added three new clients who received the disclosure form that should have been updated to the new format.

Besides the fine, the firm agreed to hire an outside consultant to help it comply with securities laws, including updating its ADV Part 2.

Form ADV: Essential Adviser Information

Investment advisers are required to provide their background information on Form ADV, which is split into two parts. Part 1 is a check-the-box form with information about the IA’s business, employees, ownership, clients, and any disciplinary actions involving the IA or its employees.

Part 2 is a plain language narrative that serves as the primary disclosure document for investment advisers. It contains information about:

  • The IA’s business practices and any significant changes the firm has undergone recently
  • Fees and compensation
  • Multiple costs folded into a “wrap fee” charged to clients
  • Conflicts of interest that the firm has or may have in representing you
  • Firm’s social media accounts
  • Types of clients the firm has
  • Disciplinary information, if any, about the firm and its employees
  • When and how the firm reviews client accounts
  • Financial information about the firm

Investors should thoroughly review Parts 1 and 2 before doing business with an investment adviser. Both parts are available on the SEC’s IAPD website and via the State Securities Board Registration Checks.