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.

The Part 2 instructions require the brochure and supplements to be written in plain English, concise and direct, with the clients' level of financial sophistication in mind. The adviser should:

• Use short sentences; definite, concrete, everyday words; and active voice
• Use tables or bullet lists for complex material whenever possible
• Avoid legal jargon or highly technical business terms unless it explains them or believes clients will understand them
• Avoid multiple negatives

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.
• A product-sponsor bonus goes in Part 2B, not Part 1 and not Part 2A alone. When someone who is not a client gives a supervised person an economic benefit for providing advice, the supplement's additional compensation item must describe the arrangement. Part 2A alone does not carry the individual's arrangement.
• What counts as an economic benefit. Sales awards, prizes, and any bonus based at least in part on the number or amount of sales, client referrals, or new accounts count. Regular salary and other regular bonuses do not.
• Sales compensation can also appear under other business activities. If the supervised person is also a broker-dealer representative or is otherwise actively engaged in an investment-related business, the supplement must disclose commissions, bonuses, or trail fees based on selling products, and explain that this gives the person an incentive to recommend products for the compensation rather than the client's needs.
• The team exception caps supplements at five. When a team of more than five supervised persons advises a client, supplements are needed only for the five with the most significant day-to-day responsibility. A team of eight produces five supplements, not eight. The Form ADV instructions word the cap for discretionary advice; the SEC's delivery rule covers any team advice.
• A team member with no client contact and team-only discretion needs no supplement. This applies to a supervised person with no direct client contact whose discretionary authority exists only as part of a team.
• 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.

Which Supervised Persons Trigger a Supplement?

A supervised person's role triggers the Part 2B requirement in either of two ways:

• Formulates advice and has direct client contact. The person decides what to recommend and talks to the client about it.
• Has discretionary authority over the client's assets, even with no direct client contact. Discretion means deciding what to buy or sell, and how much, without the client's approval on each trade. It is not the same as physically executing a trade someone else already decided on, or having access to move the client's money. See Client Funds and Securities for the full definition of discretionary authority.

A trader who only executes decisions another person made, an operations employee who reconciles the account, and an analyst who publishes general commentary to every client all fall outside both triggers, so no supplement is owed for any of them.

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

An exemption removes only the duty to deliver the document. The fiduciary duty to disclose material facts, such as a material conflict of interest, still applies to an exempt client.

What Is the NASAA Model Brochure Delivery Rule for State-Registered Advisers?

Under the NASAA Brochure Rule Requirements for Investment Advisers Model Rule, 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 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?

The annual delivery obligation is triggered only by material changes. If nothing material changed since the last delivery, the adviser owes clients no annual brochure, no summary, and no annual notice. A new disciplinary event has its own, earlier trigger (see below).

If material changes did occur, within 120 days of the adviser's fiscal year-end, the adviser must deliver either of these without charge:

• 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

The "without charge" duty covers both options. The adviser may not bill the client for delivering the updated brochure, and the federal brochure rule has no exception for printing or postage costs. A fee for an annual delivery, however small, makes that delivery deficient.

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

What Happens Between Annual Updates?

The 120-day cycle is the routine annual obligation, not a ceiling on how long an adviser may sit on stale information. Separately and continuously, the adviser must update the brochure promptly whenever any information in it becomes materially inaccurate, such as a new disciplinary event or a change in the adviser's business practices.

Updating the brochure is one duty. Delivering the update to clients is a second duty, covered next.

What Must Clients Receive When a Disciplinary Event Is Added Between Annual Updates?

Most interim amendments do not go to clients. One kind does. When an amendment adds disclosure of a disciplinary event, or materially revises disclosure already made about one, the adviser must deliver one of these to each client promptly after creating the amended brochure or supplement:

• The amended brochure or brochure supplement, together with a statement describing the material facts of the change, OR
• A statement describing the material facts of the change alone

This applies to Form ADV Part 2A Item 9 (the firm) and Part 2B Item 3 (each supervised person). The SEC brochure delivery rule sets it, and the Form ADV instructions point to similar state rules. The rule gives no number of days: the standard is "promptly."

Other interim amendments need not be delivered to clients. A fiduciary must still tell clients about material changes between annual updates, but the interim-delivery trigger is the disciplinary disclosure.

Exam Tip: Gotchas

• "Promptly" beats the calendar. When a stem gives you a disciplinary event mid-year, the answer is prompt delivery to clients of the amended brochure or a statement of the material facts, not "at the next annual amendment." The 90- and 120-day figures are the decoys.
• Three clocks, three triggers. Filing the annual amendment with regulators: 90 days after fiscal year-end. Annual delivery to existing clients: 120 days after fiscal year-end, only if there were material changes. Delivery of a new disciplinary disclosure: promptly after the amendment, with no day count. Neither the 90 nor the 120 starts at the disciplinary event.
• A change in assets under management or in the fee schedule alone does not by itself force an interim brochure update.
• 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.
• Date example for the first two clocks. 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.
• No material changes means no annual delivery, not a "here's what didn't change" notice. The 120-day clock only produces an obligation when there's something to report. It does not cancel the prompt-delivery duty for a new disciplinary disclosure.

What Is Form CRS, the Relationship Summary?

Form CRS (Form ADV Part 3) is a short, plain-English relationship summary for retail investors. It is an SEC requirement, so SEC-registered advisers and broker-dealers file and deliver it; state-registered advisers generally do not. It sits alongside the brochure rather than replacing it.

Five standardized headings, in this prescribed order:

1. Introduction
2. Relationships and Services
3. Fees, Costs, Conflicts, and Standard of Conduct
4. Disciplinary History
5. Additional Information (where to find full disclosures, including Form ADV)

Length is capped: two pages for a firm registered only as a broker-dealer or only as an adviser, and four pages for a dual registrant.

Conversation starters: Headings 2 through 5 (Relationships and Services; Fees, Costs, Conflicts, and Standard of Conduct; Disciplinary History; Additional Information) each carry required "conversation starters": questions the retail investor can ask the firm's financial professional.

• They are part of the summary itself, in the prescribed item order, not an add-on kept in a separate supplement
• The firm must make them more noticeable than the surrounding text, for example with a larger or different font, bold or italic type, a text box, or lines that set them off
• The firm must respond to each item and may not add disclosure the instructions neither require nor permit
• A link or reference to fuller information, such as the Form ADV brochure or a fee schedule, can support a response but does not replace the concise response

Initial delivery to a new retail investor: The first delivery has its own trigger. It does not wait for a request, and the 30-day request deadline below does not apply to it.

A broker-dealer that opens an account before it recommends anything or places any order owes the summary no later than account opening, because opening the account is the earliest trigger. An existing customer gets a new copy before or at the time the firm opens a different account, recommends a retirement rollover, or recommends a new service or investment not tied to a new account.

Keeping it current:

• File an amended Form CRS within 30 days of information becoming materially inaccurate
• Communicate the change to each existing retail client within 60 days after the amendment is required, at no charge
• Deliver a current copy within 30 days of any retail investor's request
• Post the current version prominently on the firm's public website, if it has one

Exam Tip: Gotchas

• Two 30s and a 60. File the amendment within 30 days, communicate it to existing clients within 60 days, and honor a request within 30 days. The 60-day figure runs from when the amendment was required, not from when the firm got around to filing it.
• The 30 days after a request is not extra time for the first delivery. Initial delivery is due before or at the earliest trigger (the advisory contract, or for a broker-dealer the first recommendation, order, or account opening). The 30-day clock starts only when a retail investor asks for a current copy.
• Investment strategy and performance are not Form CRS headings. The five headings are fixed and in a fixed order; a question listing "investment strategy" or "performance" among them is testing whether you know the actual set.
• Conflicts of interest have no heading of their own. Fees, costs, conflicts, and standard of conduct share heading 3. A question asking where a client finds a firm's conflicts is asking for that combined heading, not for "Conflicts of interest," "Services offered," or "Fees and costs."
• Conversation starters are required content, not an extra. They sit inside the summary next to the topic they belong to. A question that moves them to a supplement, or drops them to save space, describes a noncompliant summary.
• A cross-reference never replaces the concise answer. A link to the brochure or a fee schedule can add to a Form CRS response; it cannot stand in for it.
• The page cap follows the registration type. A stand-alone broker-dealer or stand-alone adviser gets two pages. A four-page summary is allowed only for a dual registrant that combines both services in one summary.
• Form CRS never substitutes for another disclosure. Delivering it does not satisfy the brochure obligation or any other disclosure duty under the securities laws.

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
• How the adviser is compensated, its fee schedule, and whether fees are negotiable (Form ADV Part 2A Item 5.A)
• Billing method: whether fees are deducted from client assets or billed, and how often (Part 2A Item 5.B). This is a separate disclosure from the compensation description above
• Compensation for selling products, such as commissions, sales charges, or service fees paid to the adviser or its supervised persons (Part 2A Item 5.E): disclose that the compensation exists, explain that it is a conflict of interest that gives an incentive to recommend products based on the compensation rather than the client's needs, and describe generally how the adviser addresses the conflict
• Types of clients served
• Methods of analysis, investment strategies, and risk of loss
• Disciplinary information (legal or regulatory actions): Form ADV Part 2A Item 9 (the firm) and Part 2B Item 3 (each supervised person) use the same rule. Each presumes a disciplinary event material, and therefore disclosable, for 10 years after it occurred
• All material conflicts of interest (compensation arrangements, proprietary products, referral fees), disclosed in writing and before any advice is rendered, as the NASAA Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers Model Rule requires
• Whether the adviser or any employee has discretionary authority over client accounts
• Whether the adviser votes proxies on behalf of clients
• Financial conditions reasonably likely to impair the adviser's ability to meet contractual commitments when the adviser has discretionary authority or custody
• The same financial-condition disclosure when prepaid fees exceed $1,200 per client for an SEC-registered adviser or $500 per client for a state-registered adviser, in each case six months or more in advance
• A state-registered adviser may also have to file a balance sheet with the Administrator under the NASAA Financial Reporting Requirements for Investment Advisers Model Rule; that filing rule is covered in the adviser-registration unit

Exam Tip: Gotchas

• The 10-year disciplinary lookback is a presumption, not a hard cutoff. An event the adviser resolved favorably can be dropped from disclosure sooner. An event older than 10 years must still be disclosed if it remains material to a client's evaluation of the adviser.
• Conflict disclosure has a form and a deadline, and the exam tests both. It must be in writing, and it must come before advice is rendered. Telling the client verbally and confirming in writing afterward does not satisfy the rule, and neither does written disclosure sent after the advice was already given.
• Disclosing the payment is not disclosing the conflict. A brochure that says the adviser receives commissions, lists the products that pay them, or gives compensation totals still falls short. It must also explain that the compensation gives the adviser an incentive to recommend those products over what the client needs. A description of the firm's conflict procedures adds to that explanation and does not replace it.
• Delivery satisfies the rule; the client's signature does not decide it. The adviser must deliver the written conflict disclosure before advice is rendered. The rule does not require the client to sign, initial, or otherwise acknowledge the disclosure in writing, and a client who asks for a verbal walkthrough of a form already delivered on time does not undo that delivery.

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 Must a Broker-Dealer Disclose Before a Transaction?

Everything above belongs to the advisory relationship. NASAA's rule on dishonest or unethical business practices of broker-dealers and agents, the NASAA Dishonest or Unethical Business Practices of Broker-Dealers and Agents Model Rule, adds one disclosure duty that runs to a customer of a broker-dealer (BD), and the exam tests its timing.

When Must a Control Relationship With the Issuer Be Disclosed?

A BD must tell the customer that it is controlled by, controlling, affiliated with, or under common control with the issuer of a security before entering into any contract with or for that customer to buy or sell it. If the firm makes that disclosure orally, written disclosure must follow at or before completion of the transaction.

• The trigger is the control relationship itself, not whether it changed the recommendation
• The deadline runs to the contract, not to settlement and not to the confirmation

Exam Tip: Gotchas

• The disclosure runs before the contract, but the writing can come later. Oral disclosure before the contract is permitted, provided written disclosure still arrives at or before completion of the transaction.
• The trigger is the relationship, not its effect. A firm owes the disclosure even when the control relationship played no part in the recommendation and the price was fair.

Source: NASAA Model Rule on Dishonest or Unethical Business Practices of Broker-Dealers and Agents (April 2025)

What Does NASAA Recommend for Miscellaneous Fee Schedules?

NASAA publishes nonbinding model guidelines, not a model rule or legal interpretation, for retail broker-dealer schedules of miscellaneous account and service fees. The guidelines recommend an accessible chart, table, or list on the firm's public website without password protection.

The schedule covers charges such as account transfer, inactivity, and wire fees. Transaction-based commissions and markups, and investment advisory fees, are disclosed through other documents rather than included on this schedule.

Exam Tip: Gotchas

• Guidance is not a mandate. A question about this NASAA resource should ask what a firm should do, not what every broker-dealer must do under a model rule.
• Account transfer fees belong; commissions do not. The schedule covers miscellaneous account and service charges, not every form of compensation.

When Does Pledging Customer Securities Require Written Consent?

If a broker-dealer hypothecates, or pledges, customer securities on which the firm has no lien, the same NASAA Dishonest or Unethical Business Practices of Broker-Dealers and Agents Model Rule requires the customer's written consent promptly after the initial hypothecation transaction. Merely saying that securities are held in a margin account does not establish this separate consent requirement; the no-lien condition matters.

Does Delivering a Prospectus Satisfy the Disclosure Duty?

No. A separate NASAA statement of policy, covering dishonest or unethical practices in connection with investment company shares (the NASAA Statement of Policy Regarding Dishonest or Unethical Practices by Broker-Dealers and Agents in Connection with Investment Company Shares), provides that delivering a prospectus is not dispositive that the BD or agent gave the customer full and fair disclosure. Handing over the document does not, by itself, prove the duty was met.

Independent disclosure duties survive delivery and reach beyond the prospectus. The same statement names them:

• Breakpoints. Disclose any sales-charge discount available at or above a breakpoint, and any letter of intent feature that would reduce the charge
• Share class suitability. In a multi-class arrangement, recommend a class only with reasonable grounds to believe its sales-charge or fee arrangement suits the customer's objectives, financial situation, other holdings, and the associated fees
• Sales charges and fees. State them to the customer rather than leaving them to be found in the document

Exam Tip: Gotchas

• "We delivered the prospectus" is never a complete defense. A stem in which the firm delivered the prospectus and disclosed nothing else describes the violation, not the cure.
• This statement of policy governs investment company shares. Do not stretch "the prospectus is not dispositive" into a general rule for every security.
• The prospectus is a floor. It sets what the customer must receive, not the limit of what the firm must say.

Source: NASAA Statement of Policy Regarding Dishonest or Unethical Practices by Broker-Dealers and Agents in Connection with Investment Company Shares

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 (the NASAA Agency Cross Transaction of Investment Advisers Model 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: the same adviser may not have recommended the transaction to both the seller and the purchaser

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 supervised person providing advice, including additional compensation from non-clients such as product-sponsor sales bonuses
• 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
• Between annual updates, update the brochure promptly when it becomes materially inaccurate, and deliver a new disciplinary (Item 9) disclosure to clients promptly too; assets under management or fee changes alone do not force an update
• Material conflicts of interest must be disclosed in writing and before advice is rendered; verbal disclosure confirmed in writing afterward does not satisfy the rule
• Part 2B supplements are capped at five when a team of more than five supervised persons provides a client's advice (the Form ADV instructions word it for discretionary advice)
• Form CRS has five fixed headings (Introduction; Relationships and Services; Fees, Costs, Conflicts, and Standard of Conduct; Disciplinary History; Additional Information), capped at two pages for a single registrant and four for a dual registrant
• Form CRS timing: a broker-dealer delivers before or at the earliest of a recommendation, an order, or account opening; an adviser, before or at the advisory contract. Amendments: file in 30 days, tell clients in 60; requests: 30 days.
• A BD discloses a control relationship with the issuer before entering into the contract; oral disclosure is allowed then, but written disclosure must follow at or before completion of the transaction
• Delivering a prospectus is not dispositive of full and fair disclosure on investment company shares; breakpoints, letter-of-intent features, share class suitability, and the sales charges themselves are independent duties
• 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