DEFINITION of 'Brochure Rule'

The brochure rule is a requirement under the Investment Advisers Act of 1940 that requires investment advisers to provide a written disclosure statement to their clients. The rule, officially known as rule 204-3, applies to all federally registered investment advisers and specifies times during the advisory process at which they must provide the materials.

BREAKING DOWN 'Brochure Rule'

The U.S Securities and Exchange Commission specifies two ways in which an adviser can satisfy the brochure rule:
1) The adviser can provide such disclosure by giving the client Form ADV Part 2A (brochure) and Part 2B (brochure supplement).
2) The adviser can provide an actual brochure that contains the same information that would be found in Form ADV Part 2A and 2B.

What is Included in the Brochure

The document must include the following information:

  • Background information of the adviser
  • 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 adviser 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 has occurred within the past 10 years
  • Any financial condition of the adviser (such as bankruptcy) that might impair its ability to meet client commitments must also be disclosed if the adviser:
    • 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

Who Should Receive a Brochure

The brochure rule states that the required information must be provided to new clients at least 48 hours before entering into an advisory contract. Advisers must give existing clients a new brochure every year. Failure to provide the brochure is considered fraudulent behavior.

Exceptions to the Brochure Rule

SEC-registered advisers are not required to deliver a brochure to either (i) clients that are SEC-registered investment companies or business development companies; or (ii) clients who receive only impersonal investment advice from the adviser and who will pay the adviser less than $500 per year.

An SEC-registered adviser is not required to deliver a brochure supplement to a client (i) to whom it is not required to deliver a brochure, (ii) who receives only impersonal investment advice, or to (iii) certain officers and employees of the adviser itself.

RELATED TERMS
  1. SEC Form ADV

    SEC Form ADV is used by investment advisers to register with ...
  2. SEC Form ADV-H

    An application for either a temporary or continuing hardship ...
  3. Form ADV

    Form ADV is a required submission to the Securities and Exchange ...
  4. SEC Form N-SAR

    SEC Form N-SAR is a U.S. Securities and Exchange (SEC) filing ...
  5. Know Your Client - KYC

    The Know Your Client form ensures investment advisors know details ...
  6. Guaranteed Investment Fund (GIF)

    A guaranteed investment fund allows a client to invest in an ...
Related Articles
  1. Financial Advisor

    5 Traits the Best Financial Advisors Share

    Discover what the best financial advisers share in terms of the traits they possess, and learn what clients value most in their advisers.
  2. Financial Advisor

    Is An Online Financial Advisor Right For You?

    Is an online adviser right for you? As with most questions in financial planning, the answer is 'it depends.' Here are a few thoughts to consider.
  3. Retirement

    The Risk of Offering Social Security Advice

    Savvy financial advisers will either need to gain Social Security advice expertise or find a source or partner to provide this vital service to clients.
  4. Financial Advisor

    3 Digital Platforms FAs Should Keep on Their Radar

    Find out which digital platforms financial advisers should look to as the trend toward adviser-based digital advice continues into 2016.
  5. Financial Advisor

    What Are Virtual Financial Advisors?

    The internet has provided a convenient way for financial advisors to offer their services to a wide customer base through virtual financial advising.
  6. Financial Advisor

    4 Signs Your Financial Advisor Is Ripping You Off

    Pay attention to the habits of your financial adviser to avoid him ripping you off by commingling, churning, scamming or embezzling your money.
  7. Financial Advisor

    Retirement Plan Advisors: Here's What the SEC Expects

    Here's what the SEC looks for when advisors align clients' suitability with investments.
  8. 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.
  9. 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.
  10. Tech

    What Advisors Should Know about Millennial Clients

    Millennials are coming of age, advancing their careers, having families and thinking retirement. At 80 million strong, advisors need to court them now.
RELATED FAQS
  1. De Minimis Exemption What Does It Mean?

    It means an investment adviser is exempt from registration if it has 5 or fewer clients over a 12-month period in a state ... Read Answer >>
  2. What is private wealth management?

    Understand what private wealth management is from the perspective of both the private client as well as the private wealth ... Read Answer >>
Trading Center