Required Disclosures to Clients
Investment advisers (IAs) must disclose all material facts to clients. Understanding what must be disclosed, when, and how is one of the most frequently tested areas on the Series 65 exam.
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 antifraud provisions of Investment Advisers Act of 1940 (IAA) Section 206 and the Uniform Securities Act (USA)
- 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.
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.
| Part | Contents | Delivery |
|---|---|---|
| Part 2A (Brochure) | Services offered, fees, investment strategies, disciplinary history, conflicts of interest | Before or at contract signing (see below) |
| Part 2B (Brochure Supplement) | Education, business background, and disciplinary history of each supervised person who provides advice | Delivered with Part 2A |
Exam Tip: Gotchas
- Part 2A is the client-facing brochure. The exam tests which part goes to whom.
- Part 2B (Brochure Supplement) covers individual investment adviser representatives (IARs), not the firm. If a specific IAR provides advice or has discretion, clients must receive their supplement.
Brochure Delivery: The 48-Hour Rule (Securities and Exchange Commission (SEC) Rule 204-3)
The IA must deliver the Part 2A brochure using one of two options:
| Option | Timing | Condition |
|---|---|---|
| Option 1 (Pre-delivery) | At least 48 hours before signing the advisory contract | No additional requirement |
| Option 2 (At signing) | At the time of signing the contract | Client must have the right to terminate without penalty within 5 business days of signing |
This is an either/or rule. The exam will try to make you apply both simultaneously.
Annual Update (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.
- 120 days from fiscal year-end is the deadline for the annual brochure update, not calendar year-end.
State Brochure Rules
- State-registered advisers follow state brochure rules, which mirror SEC Rule 204-3 requirements
- Requires written disclosure of services, fees, conflicts, and disciplinary information
Key Disclosures 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.