Customer Accounts - 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.
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.
ProfessionalsWhile the SEC is reviewing the securities’ registration statement, a registered representative is very limited as to what they may do with regard to the new issue. During the cooling ...
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