The Hidden Risk When Signing Form ADV: What Every Signatory Should Know

Executive Summary: Signing Form ADV is more than a routine compliance step. It creates personal liability exposure for the signatory, even when they are not a CFO or General Counsel.

This white paper outlines the legal risks tied to Form ADV signatures, recent SEC enforcement trends, and how a properly structured insurance program - particularly Directors & Officers (D&O) and General Partnership Liability (GPL) coverage - can protect individual signers.

I. Understanding the Risk: What Is Form ADV?

Form ADV is the uniform form used by investment advisers to register with both the SEC and state securities authorities. Part 1 includes information about the adviser’s business, ownership, clients, employees, and AUM. Part 2 is a narrative brochure detailing the adviser’s services, fees, conflicts of interest, and disciplinary information.

Who Signs It?

While many assume only the CFO or GC signs Form ADV, in practice, it’s often COOs, CCOs, Managing Partners, or even non-legal operations personnel. Signing certifies, under penalty of federal law, that the information is "true and correct."

II. Legal Risks for Signatories of Form ADV

1. SEC Scrutiny: Signing Form ADV exposes individuals to regulatory enforcement. The SEC has initiated enforcement actions against individuals for:

• Misstated AUM

• Falsified fund structure or public company status

• Material omissions about services or clients

Case in Point: Closed Loop Partners (Sept. 2024)

• The SEC’s administrative order found that Closed Loop violated Section 206(2) by entering into three loan transactions with its own private fund clients without disclosing the conflicts or obtaining client consent.

• They also violated Section 206(4) and custody rules by failing to provide audited financials from 2020 through 2022.

• Result: Even without showing intentional deception, the SEC considered the adviser’s failure to disclose conflicts a breach of fiduciary duty under Section 206.

Case in Point: Wisdom Capital Management Group (Dec. 2023)

• Falsely claimed it was a public company headquartered on Wall Street

• Claimed to manage $10M in U.S. private funds and advise two funds - none of which existed

• Result: SEC complaint for material misrepresentations in Form ADV

Case in Point: Lighthouse Financial Partners (2022)

• ADV failed to disclose disciplinary history of a principal

• Omitted third-party compensation conflicts

• Result: SEC action under Section 206 for failure to disclose material conflicts; signer held individually liable

Case in Point: Equity Solutions Management (2021)

• Filed ADV listing AUM of $50M that had been withdrawn prior to filing

• Signer relied on outdated internal spreadsheet, not verifying final AUM

• Result: SEC brought enforcement under Section 206; signer settled with fine and temporary bar

2. Legal Standards: Section 207 vs. Section 206 of the Advisers Act

Section 207: Willful False Statements on Form ADV

Section 207 of the Investment Advisers Act makes it unlawful to willfully make any untrue statement of material fact - or omit to state any material fact - in any Form ADV filing. The SEC has historically used this section when misstatements appear intentional or when the signer is in a position of presumed knowledge.

• Requires willfulness, not mere negligence.

• Courts have clarified that accidental or negligent omissions alone do not trigger Section 207 liability.

• However, signers may still face liability under Section 206 for the same conduct if willfulness can’t be proven.

Section 206: The SEC’s Catch-All Anti-Fraud Provision

Section 206(1) and 206(2) form the backbone of the SEC’s enforcement toolkit:

• 206(1): Prohibits using any device or scheme to defraud a client or prospective client.

• 206(2): Prohibits any transaction or course of conduct that operates as a fraud or deceit - even without intent.

Why Section 206 Matters:

• The SEC routinely invokes 206(2) in cases of negligent misstatements, omitted conflicts of interest, or failure to supervise.

• Individual signers can be named even if they didn’t prepare the Form ADV - as long as their signature appears.

• Civil penalties and reputational damage may follow, even absent criminal findings.

Key Insight: The SEC often uses Section 206(2) when they cannot meet the burden of proving willfulness under Section 207. It's become a broad hook for enforcement where negligence or oversight is enough.

3. Reputational & Career Damage

Even absent criminal charges, being named in an SEC investigation can:

• Trigger reputational harm

• Disrupt business operations

• Create future compliance barriers

III. How Insurance Protects Signatories

Not all insurance programs are designed to cover Form ADV-related exposures. The following coverages should be reviewed and, if necessary, tailored:

Exposure	Insurance Response	Key Considerations
SEC Investigations	Directors & Officers (D&O) / GPL Insurance	Must include regulatory inquiry coverage
Civil Litigation by LPs	D&O or Errors & Omissions (E&O)	Confirm individuals are named insureds
Allegations of Negligence	Professional Liability / E&O	Coverage must include disclosure obligations
Internal Disputes / Governance	Employment Practices Liability (EPL)	Includes breach of fiduciary duty claims

IV. What to Ask Your Broker

1. Are Form ADV signers individually covered under our D&O or GPL policies?

2. Is coverage triggered by informal regulatory inquiries?

3. Do we have coverage for negligent misstatements or omissions?

4. Does our policy cover both defense costs and settlements?

5. Are non-C-level personnel (COO, CCO) covered in their signing capacity?

V. Conclusion

If you're signing Form ADV, you are assuming personal legal risk - regardless of your title. In an era of heightened SEC enforcement and investor activism, it is essential that your insurance program matches the reality of that responsibility.

Upward Risk Management works with funds and private investment firms to:

• Identify gaps in D&O and GPL coverage

• Tailor insurance programs to protect individual signers

• Review policy language to ensure protection against Form ADV-related risks

Contact us to schedule a coverage audit or to download our checklist for fund signatories.

Steven Barge-Siever, Esq.

CEO Upward Risk Management

Founder undr ai

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