Series 65

AAA

Client Communication and Compensation - The Brochure Rule

What is the Brochure Rule?
The most important rule regarding disclosure is the Brochure Rule, which requires an IA to provide a written disclosure document to each investment advisory client or potential client. The IA can simply provide a copy of the Form ADV Part II or create a brochure with substantially the same content. The document must include all of the following information:

  • Background information of the IA and any IARs
  • Services available and the fees for those services, including available discounts
  • Disclosure of any compensation received from third parties (such as commissions or referral fees)
  • Whether the IA exercises discretion over client funds
  • Types of clients for whom advisory services are provided, including any minimum dollar amount of assets to be managed
  • Disclosure of any affiliation with a broker-dealer
  • Any material legal or disciplinary action that occurred within the last 10 years
  • Any financial condition of the IA (such as bankruptcy) that might impair its ability to meet client commitments must also be disclosed if the IA:
    • Has discretion over client accounts
    • Has custody of client money or securities
    • Requires prepayment of more than $500 in fees, more than six months in advance

When must documentation be provided?

  • New Clients: The brochure must be provided at least 48 hours before entering into an advisory contract, OR at the time of entering into a contract, if the client has the right to terminate the contract without penalty within five business days.

  • Existing Clients: Each year, the IA must deliver (or offer to deliver) its disclosure document to existing clients. Failure to meet disclosure requirements is considered fraudulent behavior.



Exam Tips and Tricks
It is crucial for you to know when the brochure must be given; the timing of this disclosure is frequently tested on the exam.

Hints:
  • It is NOT true that a brochure must be provided prior to entering into the contract. The contract must explicitly offer the right to terminate without penalty within five business days - if this is not part of the contract, the brochure may not be provided at the time of signing the contract.
  • Watch for answers such as "...if the IA states they have a right to terminate within five business days...." This answer would be incorrect, since a verbal statement is not sufficient.


Special Disclosure Requirements
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