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

Related Articles
  1. Managing Wealth

    Asset Manager Ethics: Disclosures

    Effective communication and disclosures go a long way towards easing minds and creating a lasting and trusting symbiotic relationship. Here are the four steps to making good disclosures.
  2. Investing

    Advisory Fees On The Series 66 Exam

    Learn what you need to know about investment advisory fees and contracts to pass the Series 66 exam.
  3. Financial Advisor

    4 Ways To Build Your Client Book

    Growing your client book takes more effort than simply running a radio or newspaper ad.
  4. Managing Wealth

    Asset Manager Ethics: Acting In the Benefit of Clients

    Investment managers should always act to benefit the client. Learn what actions managers should take on a client's behalf.
  5. Financial Advisor

    Manage Your Clients' Expectations

    You can't control how they react to the market, but you can help them understand the reality of the situation.
  6. Financial Advisor

    SEC Audit? How Financial Advisors Can Be Ready

    Your firm may never be audited by the SEC, but you need to be prepared nonetheless. Follow these tips to make sure you're in compliance and organized.
  7. Financial Advisor

    Losing a Client Is Not Always The End of The World

    Losing a client is never pleasant for a financial advisor, but sometimes this is a better outcome than continuing the relationship.
  8. Personal Finance

    When (And How) To Fire A Client

    Firing the clients who take more of your time and effort than the revenue they contribute is a great way to improve your bottom line.
  9. Financial Advisor

    How to Handle Your First Meeting with a Client

    Here's what financial advisors should do in an initial client meeting to start off on the right foot.
  10. Financial Advisor

    Top Reasons Why Advisors Don't Get Referrals

    These corrective steps will go a long way toward allowing financial advisors to stand out as being deserving of a referral.
Frequently Asked Questions
  1. Depreciation Can Shield Taxes, Bolster Cash Flow

    Depreciation can be used as a tax-deductible expense to reduce tax costs, bolstering cash flow
  2. What schools did Warren Buffett attend on his way to getting his science and economics degrees?

    Learn how Warren Buffett became so successful through his attendance at multiple prestigious schools and his real-world experiences.
  3. How many attempts at each CFA exam is a candidate permitted?

    The CFA Institute allows an individual an unlimited amount of attempts at each examination.Although you can attempt the examination ...
  4. What's the average salary of a market research analyst?

    Learn about average stock market analyst salaries in the U.S. and different factors that affect salaries and overall levels ...
Trading Center