Required Product Disclosures
Before a customer can invest, they need to understand what they're buying. Federal and state law require specific disclosure documents for different product types, and the exam tests which document goes with which product.
Prospectus Delivery (Securities Act of 1933, Section 5)
- A prospectus must be delivered to the purchaser at or before the time of sale for securities sold via a registration statement under the Securities Act of 1933
- A preliminary prospectus (also called a "red herring") may be distributed during the cooling-off period, but it does NOT constitute an offer to sell. It is for informational purposes only
- The final prospectus must accompany or precede the confirmation of sale
- For mutual fund shares, the prospectus must be delivered at or before the sales solicitation or presentation. The investor must receive it before or with the confirmation of purchase
Exam Tip: Gotchas
- The preliminary prospectus (red herring) is NOT an offer to sell. It is distributed during the cooling-off period for informational purposes only. The final prospectus is what must accompany or precede the confirmation of sale.
Options Disclosure Document (ODD)
- The ODD is published by the Options Clearing Corporation (OCC), not by FINRA or the SEC
- Official title: "Characteristics and Risks of Standardized Options"
- The ODD must be delivered at or prior to the time of account approval for options trading (FINRA Rule 2360)
- Any amendments to the ODD must be delivered when transaction confirmations are sent
- The ODD describes the characteristics of exchange-traded options, including risks, tax consequences, and the mechanics of exercise and assignment
Official Statement (Municipal Securities)
- For municipal securities offerings, the official statement serves a similar disclosure function to the prospectus
- It provides information about the issuer, the terms of the bond, and the security behind the debt
- Broker-dealers must deliver the official statement to customers at or before the time of trade confirmation
Product-to-Document Mapping
| Product Type | Required Document | Published/Issued By | Delivery Timing |
|---|---|---|---|
| Registered securities (stocks, bonds) | Prospectus | The issuer (filed with SEC) | At or before time of sale |
| Mutual fund shares | Prospectus | The fund company | Before or with confirmation |
| Exchange-traded options | Options Disclosure Document (ODD) | Options Clearing Corporation (OCC) | At or before account approval |
| Municipal securities | Official statement | The issuer/underwriter | At or before trade confirmation |
Exam Tip: Gotchas
- The prospectus is for registered offerings under the 1933 Act. The ODD is specific to options accounts and is published by the OCC (not FINRA). The official statement applies to municipal securities.
- The exam may present a scenario and ask which document must be delivered. Match the product to the document.