Client Communication and Compensation - Special Disclosure Requirements

Under the Uniform Securities Act, additional disclosure is required if the IA acts as principal for its own account or as broker for both an advisory client and another person on any securities transaction. In these instances, the IA must disclose (prior to completion of the transaction) the capacity in which it is acting and must receive the client's written consent.
Special disclosure is also required for wrap accounts:

  • Wrap fee (or wrap account) programs require a special disclosure form (Schedule H) attached to Form ADV Part II. For these purposes, the SEC definition does NOT include:
    • Managed account programs - traditional portfolio management services offered by money managers

    • Mutual fund asset allocation programs - bundled programs that charge a fee based on the percentage of the total assets being managed within a portfolio of no-load (or load-waived) mutual funds

A wrap account is an account under which investment advisory services and brokerage trades are "wrapped" into a single fee that is not based on the number of transactions in an account.

The wrap fee disclosure in Schedule H must include the following information (where applicable):

  • The amount of the wrap fee, the services that are included and whether the fees are negotiable
  • Any additional fees that might be required
  • What methods are used to select portfolio managers
  • What compensation is paid to the person who recommended the program

Form 13F Disclosure
An IA may be subject to additional disclosure requirements under other federal statutes, other than the Investment Advisers Act of 1940. Under the Securities Exchange Act of 1934, an IA exercising investment discretion over an equity portfolio of $100 million or more is required to file on a quarterly basis a Form 13F disclosing the holdings it manages on its behalf or on the behalf of others.


Exam Tips and Tricks
Be prepared to answer a number of questions on the "brochure rule". Also, familiarize yourself with what must be included on Form ADV Part II. Here are two questions you might encounter on the exam:

The brochure rule applies to:

  1. Only discretionary advisory contracts
  2. Only written advisory contracts
  3. Only oral advisory contracts
  4. Both oral and written advisory contracts

The correct answer is "d". The brochure rule applies to all investment advisory contracts.

  1. Under the brochure rule, the IA's clients (or potential clients) must receive a copy of the brochure:
    1. At least 48 hours prior to entering into an advisory contract
    2. Within 24 hours of entering into an advisory contract
    3. At the time of entering into an advisory contract, as long as the client can terminate the contract without penalty within three days
    4. Within five days of entering into an advisory contract

The correct answer is "a". Option "c" is wrong because this provision only applies if the client can terminate within five days.

Investment Advisory Contracts


Related Articles
  1. Options & Futures

    Wrap It Up: The Terms And Benefits Of Managed Money

    Find out if fee-based investing is right for you, by learning its terminology and types of investment vehicles.
  2. Mutual Funds & ETFs

    That's A (Mutual Fund) Wrap!

    These advisory programs offer professional supervision and other handy tools for building a diversified portfolio.
  3. Your Practice

    Buying an Advisory Practice: How to Get it Right

    Before purchasing a financial advisory practice, ensure due diligence is done and you understand the business and culture of the organization in question.
  4. Financial Advisors

    Growth Strategies For Financial Advisors

    These 5 strategies offer financial advisors a blueprint on how to grow their practices.
  5. Trading Strategies

    Selecting Mergers & Acquisitions Advisories For Small Businesses

    Mergers and acquisitions advisories aren't just for big players. Many advisory firms cater to small and medium businesses.
  6. Active Trading

    What Would Full Disclosure Mean For The Market?

    In the wake accounting scandals, more people are calling for full disclosure. But what would that even help?
  7. Your Practice

    How the SEC Wants to Improve Disclosure of Fees

    The SEC wants investment companies to alter the way they disclose fees for mutual funds in the hopes to help clients know how much they're paying.
  8. Personal Finance

    Want To Know What Disclosures Mean ... In Plain English?

    Disclosures are the fine print in financial reports. We strip away the legal speak to tell you what they really mean.
  9. Personal Finance

    Are Financial Advisor Fees Too High?

    Fees charged by financial advisors run the gamut. Are you getting a fair deal or paying too much?
  10. Investing

    M&A Advisory Business Boutiques: How The Small Shops Are Capturing Large M&A Deals

    M&A advisory boutiques are becoming a big business, giving large investment banks a run for their money.
RELATED TERMS
  1. Mutual Fund Wrap

    Also known as a mutual fund advisory program or a wrap account, ...
  2. Brochure Rule

    Under the Investment Advisor's Act of 1940, the Brochure Rule ...
  3. Wrap Account

    An account in which a brokerage manages an investor's portfolio ...
  4. Advisory Management

    A group within a bank or brokerage that provides professional, ...
  5. ETF Wrap

    A type of special investment portfolio in which an investor, ...
  6. Federal Advisory Council

    A group of 12 banking executives - one from each Federal Reserve ...
RELATED FAQS
  1. What is a wrap account and what are the advantages of using one?

    Wrap accounts, in which brokerage account costs are "wrapped" into a single or fixed fee, are great if you don't have time ... Read Answer >>
  2. Under the “Brochure” rule of the Investment Advisers Act of 1940, which of these ...

    Under the "Brochure" rule of the Investment Advisers Act of 1940, which of these statements is true? a. The ADV Part II or ... Read Answer >>
  3. Under what circumstances can an IA choose to sell a security for a client without ...

    A. When the transaction is less than $5,000B. When the IA decides only how many shares to sellC. When the client tells the ... Read Answer >>
  4. Where do I look for fees that I am charged on investments? What are those fees called?

    The fees and expenses charged for investments vary. The fees usually depend on the type of investment and the investment ... Read Answer >>
  5. What kinds of fees are involved in futures trading?

    Learn what the various costs are that are charged by brokerage firms and trading exchanges to individual futures trading ... Read Answer >>
  6. What are the disclosure requirements for a private placement?

    Learn about the SEC rules for disclosure requirements in private placement offerings, and understand what type of information ... Read Answer >>
Hot Definitions
  1. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  2. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  4. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  5. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  6. Sharing Economy

    An economic model in which individuals are able to borrow or rent assets owned by someone else.
Trading Center