Series 65
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:
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
- 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:
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