Customer Accounts - Required Disclosures

Required Disclosures

I. Product Mutual Funds: the representative must deliver a prospectus to the client at or before the time of sale. The prospectus contains certain required disclosures, to wit:

i. Fees and expenses: the fund's expense ratio, the 12b-1 fee for distribution and marketing expenses, any sales charges as a function of the share class.

ii. A discussion of the availability of breakpoints, letters of intent and rights of accumulation.

iii. A description and discussion of the fund's strategy

iv. A discussion of the fund's risks

v. The Statement of Additional Information (SAI), incorporated by reference in the prospectus, the SAI provides additional information on the workings of the mutual fund company to the investor. It is supplementary by nature, not required to be delivered to the client at or before the point of sale, but must be delivered on request.

vi. Trade confirmations: a confirmation of any purchases or sales must be sent to the client.

Options (NASD Rule 2860(b)(11)) - clients who desire to purchase and trade options must be given the Options Disclosure Document (ODD), which describes the characteristics and risks of exchange traded options. Delivery must occur at, or prior to, the time that the client is approved to trade them. Any amendments to the ODD must be delivered to the client, as well, by the time that the customer receives any transaction confirmation on an options trade. The Options Clearing Corporation, a regulated clearing agency, publishes Characteristics and Risks of Standardized Options.


i. New issues: the red herring, also known as the preliminary prospectus, is the document distributed to prospective investors that describes details of the business that is looking to raise money, along with attendant industry-specific risks. The initial share price to be offered is left blank. This applies to closed-end and exchange-traded funds as well.

ii. Aftermarket issues: prospectus to be delivered at, or prior to, the time of sale. The prospectus describes the nature of the business, its broader industry and the various risks and rewards associated with investment in a particular company.

iii. Trade Confirmations: the client must receive a confirmation of any trade once that trade settles.

Fixed Income: exchange traded bonds (corporates) issue a prospectus; over-the-counter bonds, such as municipal issues, distribute an official statement. These are similar and disclose risks and fees associated with the purchase, including use of proceeds, tax implications and a discussion of the issuer and its business. The official statement discusses the municipal bond's interest rate, timing and manner of payment of the bond, the bond's minimum denomination for sale, the source of bond proceeds (e.g., a general obligation bond repays the issue from tax revenues, a revenue bond repays the issue from the financed projects proceeds, such as a tolls from an interstate highway), the consequences of default and the existence, if any, of any backstop arrangements to guarantee interest payments (insurance or letters of credit).

Direct Participation Programs (DPPs): a representative is required to deliver an offering circular or memorandum to prospective investors who must satisfy net worth and income requirements. The document details risks and fees associated with the investment, as well as a discussion of the flow-through of tax benefits due to direct participation in the program.

Hedge Funds/Private Equity: offered to accredited investors through an offering circular, hedge fund disclosures include a discussion of the strategy, fees (asset management and incentive) and the various risk involved, along with the lock-up period during which an investor may not remove funds. This is to allow the manager sufficient time to put the strategy to work.

II. Representative Activities

Outside Business Activities: any outside employment, whether or not remunerated, must be disclosed to the broker/dealer prior to engaging in the activity to seek approval.
Personal Investment Accounts: a representative must disclose the existence of any investment accounts of which she or her family is the beneficial owner, held outside of the broker/dealer. The representative's investments and investment activity must be transparent to the broker/dealer that employs him or her, so as to be able to monitor any activity or potential conflicts of interest and prohibited transactions.
Private Securities Transactions: examples of which would be private limited partnerships or business ventures. The broker/dealer must approve all such transactions before the representative may enter into them.
Conflicts of Interest: these must be disclosed, as they could affect the representative's impartiality in servicing clients. An example would be a representative owning the same security as the client. Are the representative's recommendations on this particular security in the client's best interest or do they potentially benefit the representative at the client's expense?
Personal Bankruptcy: the representative is required to disclose to his or her supervisor if he or she has filed for bankruptcy, as the representative will most likely be subject to heightened supervision.
Civil or Criminal convictions: these must be disclosed to the broker/dealer and often result in the representative's inability to work in the profession.
Regulatory reprimands: any bar, sanction, fine levied must be disclosed on the broker's U-4 registration statement.

III. Miscellaneous

a. Registered Investment Advisors: are required to give their client a brochure that details their services (the brochure rule). Information includes fees, client types served, investment style, education and professional background of key employees, etc. This comprises everything disclosed in Form ADV Part II that advisors file when registering with the SEC.

Related Articles
  1. Brokers

    Broker-Dealer Industry 101: The Landscape

    Independent broker-dealers are a great choice for experienced, self-starter planners who have established practices.
  2. Personal Finance

    RIAs and Brokers: What's the Difference?

    RIAs and brokers are held to different standards when providing investment advice. Here's how they differ.
  3. Trading Systems & Software

    Steps to Starting Up an Independent Broker Dealer

    Launching your own broker-dealer is a lot of work, but the potential payoff is great, both personally and financially.
  4. Professionals

    How To Answer Option Questions On The Series 7 Exam

    Learn how to answer option questions on the Series 7 exam. Pass your Series 7 exam with the help of these tips.
  5. Professionals

    Series 55

    FINRA Series 55 Exam Guide
  6. Professionals

    Series 62

    FINRA Series 62 Exam Guide
  7. Professionals

    Series 99

    FINRA/NASAA Series 99 Exam Guide
  8. Professionals

    Series 65

    FINRA/NASAA Series 65 Exam Guide
  9. Professionals

    Series 6

    FINRA Series 6 Exam Guide
  10. Professionals

    Series 63

    FINRA/NASAA Series 63 Exam Guide
  1. No results found.
  1. Do financial advisors need to pass the Series 7 exam?

    The exact nature of a financial advisor's job responsibilities determines whether he must have a Series 7 license. If a financial ... Read Full Answer >>
  2. Do financial advisors have to be licensed?

    Financial advisors must possess various securities licenses in order to sell investment products. The specific products an ... Read Full Answer >>
  3. What are the differences between the Series 6 exam and the Series 7 exam?

    The Financial Industry Regulatory Authority (FINRA) offers a variety of licenses that must be obtained before conducting ... Read Full Answer >>
Hot Definitions
  1. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  2. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  3. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
  4. Normal Profit

    An economic condition occurring when the difference between a firm’s total revenue and total cost is equal to zero.
  5. Operating Cost

    Expenses associated with the maintenance and administration of a business on a day-to-day basis.
  6. Cost Of Funds

    The interest rate paid by financial institutions for the funds that they deploy in their business. The cost of funds is one ...
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!