Required Disclosures to Clients

Investment advisers (IAs) must disclose all material facts to clients. Understanding what must be disclosed, when, and how is essential for the Series 65 exam.

What Is the Fiduciary Disclosure Obligation?

• IAs have a fiduciary duty to make full and fair disclosure of all material facts to clients and prospective clients
• This obligation flows from the Investment Advisers Act of 1940 (IAA) antifraud authority / fiduciary duty and from the Uniform Securities Act (USA) antifraud provision
• A material fact is anything a reasonable client would consider important in making an investment decision
• Omitting a material fact is just as fraudulent as making a false statement

Exam Tip: Gotchas

• Omission = fraud. Leaving out a material fact is just as fraudulent as making a false statement.

What Is Form ADV Part 2, the Brochure?

Form ADV Part 2 is the primary disclosure document for IAs: the narrative brochure that discloses the adviser's business practices, fees, and conflicts of interest.

Exam Tip: Gotchas

• Part 2A is the client-facing brochure. The exam tests which part goes to whom.
• Part 2B (Brochure Supplement) covers each individual supervised person who provides advice, not the firm. Most supervised persons who provide advice are IARs, but the master category is "supervised person"; if a specific supervised person provides advice or has discretion, clients must receive their supplement.
• Don't reach for a mutual fund document. A Statement of Additional Information (SAI) and a prospectus disclose a specific fund or security, not an adviser's own business practices. The adviser's client-facing disclosure document is always Form ADV Part 2A.

Who Is Exempt From Brochure Delivery?

A handful of narrow exemptions release an adviser from delivering the brochure at all:

• A registered investment company or business development company client, if its advisory contract satisfies the applicable Investment Company Act provision
• A client who receives only impersonal investment advice and pays the adviser less than $500 per year
• The Part 2B supplement specifically does not need to go to a client who does not receive the brochure itself, who receives only impersonal advice, or who is an officer, employee, or other person related to the adviser and would qualify as a qualified client. An outside client who merely meets the qualified-client thresholds is not exempt

What Is the Brochure Delivery 48-Hour Rule? (NASAA Model Rule for State-Registered Advisers)

The IA must deliver the Part 2A brochure using one of two options:

This is an either/or rule. The exam will try to make you apply both simultaneously.

When Must the Annual Filing With Regulators Occur? (Within 90 Days of Fiscal Year-End)

Within 90 days of the adviser's fiscal year-end, the adviser must file an annual amendment updating Form ADV with the Securities and Exchange Commission (SEC) or relevant state regulator. This is a regulatory filing obligation, separate from the client delivery obligation.

When Must Annual Brochure Delivery to Existing Clients Occur? (Within 120 Days of Fiscal Year-End)

Within 120 days of the adviser's fiscal year-end, the adviser must deliver either:

• An updated brochure with a summary of material changes, OR
• A summary of material changes with an offer to provide the full updated brochure free of charge

Clients may request a copy of the brochure at any time.

Exam Tip: Gotchas

• 48-hour OR at-signing; not both. The exam may present both options as if they must both be met. Only one is required.
• 5-business-day termination right only applies to Option 2 (delivery at signing). If the brochure was delivered 48 hours in advance, no termination right is required.
• Two deadlines, not one. Filing with regulators: 90 days. Delivering to existing clients: 120 days. For a December 31 fiscal year-end, 90 days = March 31 and 120 days = April 30. The exam uses March 31 as the decoy on client delivery questions.

How Does Brochure Delivery Differ for Federal vs. State Advisers?

• The 48-hour / at-signing-with-5-business-day rule above is the NASAA model rule for state-registered advisers
• Federal-covered advisers deliver the brochure before or at the time of entering the contract: there is no 48-hour advance option and no 5-business-day termination right
• All advisers must provide written disclosure of services, fees, conflicts, and disciplinary information

What Disclosures Are Required in All Advisory Relationships?

Every advisory relationship requires disclosure of:

• Advisory services provided and any limitations
• Fee schedule, billing method, and whether fees are negotiable
• Types of clients served
• Methods of analysis, investment strategies, and risk of loss
• Disciplinary information (legal or regulatory actions)
• All material conflicts of interest (compensation arrangements, proprietary products, referral fees)
• Whether the adviser or any employee has discretionary authority over client accounts
• Whether the adviser votes proxies on behalf of clients
• Financial conditions that could impair the adviser's ability to meet contractual commitments

Memory Aid: Think of hiring any professional: Who are you? (qualifications) What will you do? (services) What does it cost? (compensation) What's in it for you? (conflicts) Who else are you connected to? (affiliations) Can you actually deliver? (financial condition). Six questions a reasonable client would ask before handing over money.

What Are Agency Cross Transactions?

An agency cross transaction is one in which an investment adviser (IA) acts as agent for both sides of a trade: the advisory client AND another person on the opposite side (often another advisory client). The adviser has a divided loyalty, so the NASAA Model agency-cross rule imposes a strict set of conditions before such transactions may proceed.

What Are the Six Conditions?

An adviser may effect agency cross transactions only if all six conditions are met:

1. Prospective written consent: client provides written consent in advance authorizing agency cross transactions
2. Written disclosure: adviser discloses in writing that it will act as broker, receive commissions, and have a potentially conflicting division of loyalty between the client and the other party
3. Per-transaction confirmation: written confirmation sent no later than completion of each transaction, including the source and amount of any commission
4. Annual statement: adviser sends an annual written statement showing the total number of agency cross transactions and the total commissions received
5. Right to revoke: every written disclosure and confirmation must prominently state that consent may be revoked at any time
6. No dual recommendations: adviser may not recommend the transaction to both parties; at least one side must come unsolicited

Exam Tip: Gotchas

• Prospective (blanket) consent remains effective until the client revokes it in writing. It has no built-in expiration date and does not need annual renewal.
• The annual statement is a reporting obligation, not a consent renewal. It does not replace, refresh, or invalidate the client's original written consent.
• The no-dual-recommendation rule means the adviser cannot have advised both the buyer and the seller. If the adviser recommended to one side only and the other side initiated independently, the transaction is permissible.
• The right to revoke must appear in every disclosure and confirmation, not just at the original consent.
• Even when all six conditions are satisfied, the adviser still owes a continuing fiduciary duty to act in each client's best interests and to obtain best price and execution.

What Should You Check on Exam Day?

• Omitting a material fact is just as fraudulent as a false statement
• Form ADV Part 2A is the client-facing brochure (with narrow delivery exemptions, e.g. certain fund clients and impersonal-advice clients); Part 2B (supplement) covers each individual supervised person providing advice
• State-registered advisers use the 48-hour-before OR at-signing-with-5-business-day-cancellation rule; only one option is required, not both
• Federal-covered advisers deliver the brochure before or at signing, with no 48-hour advance option and no 5-business-day termination right
• Annual amendment filing with regulators is due within 90 days of fiscal year-end; annual brochure delivery to existing clients is due within 120 days
• Agency cross transaction prospective written consent has no expiration and remains effective until revoked in writing
• An adviser may never recommend an agency cross transaction to both parties, and must send both a per-transaction confirmation and an annual statement