Disclosure of Compensation

All the compensation methods and rules you have learned converge on one final principle: compensation must be disclosed. This section ties together the disclosure requirements for broker-dealers, agents, and investment advisers.

Trade Confirmation Requirements

A trade confirmation must be sent to the customer at or before the completion of every transaction. It must disclose:

For principal transactions, the markup/markdown is embedded in the price and is generally not separately disclosed on the confirmation. However, the fact that the broker-dealer acted in a principal capacity must be disclosed.

Exam Tip: Gotchas

• Trade confirmations must state agent or principal capacity on every transaction. This is a non-negotiable requirement.

BD Affiliation Disclosure

• A broker-dealer must disclose to the customer, before entering into any contract, that it is controlled by, controlling, affiliated with, or under common control with the issuer of any security being transacted
• If the disclosure is not initially made in writing, written disclosure must follow at or before the completion of the transaction

Why this matters: If a broker-dealer is selling securities issued by its parent company, the customer needs to know about that relationship before agreeing to the transaction.

Exam Tip: Gotchas

• Affiliation disclosure must come before entering the contract, not after. Written follow-up is allowed, but the initial disclosure must precede the agreement.

IA Compensation Disclosure: Form ADV

Investment advisers must disclose their compensation arrangements in Form ADV Part 2A (Brochure), Item 5:

• How the adviser is compensated (AUM fees, hourly, fixed, etc.)
• Whether the adviser receives compensation from sources other than clients
• Whether the adviser or a related person receives sales compensation (e.g., 12b-1 fees, commissions) for recommending securities

This disclosure ensures clients understand not just how much they are paying, but whether the adviser has financial incentives that could influence recommendations.

Exam Tip: Gotchas

• IA compensation disclosure is specifically in Form ADV Part 2A, Item 5. The exam tests this exact location.

The General Principle: Disclosure Does not Cure Unfair Pricing

This is the unifying theme of compensation regulation:

• Disclosure of compensation is required across all securities professionals: broker-dealers, agents, investment advisers, and IARs
• However, disclosure alone does not cure unfair pricing
• A commission or markup that is excessive remains a violation even if fully disclosed in advance

Exam Tip: Gotchas

This principle appears repeatedly on the exam. A broker-dealer cannot defend an 8% markup by saying "but I told the customer about it." Disclosure is necessary but not sufficient. The pricing must also be fair and reasonable.

Summary: Who Discloses What