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.
• The team exception caps supplements at five. No supplement is owed for a supervised person who has no direct client contact and whose discretionary authority exists only as part of a team. And when discretionary advice comes from a team of more than five such supervised persons, supplements are needed only for the five with the most significant responsibility for the day-to-day advice. A team of eight produces five supplements, not eight.
• 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

What Is the NASAA Model Brochure Delivery 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 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 brochure, no summary, and no notice that year.

If material changes did occur, 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.

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.

Exam Tip: Gotchas

• "Promptly" beats the calendar. When a stem gives you a disciplinary event or another material inaccuracy mid-year, the answer is prompt disclosure, not "at the next annual amendment." The 90- and 120-day figures are the decoys.
• 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.
• 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.
• No material changes means no delivery, not a "here's what didn't change" notice. The 120-day clock only produces an obligation when there's something to report.

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.

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.
• 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.
• 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
• 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): Form ADV Part 2A Item 9 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
• 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. A state-registered adviser may also have to file a balance sheet with the Administrator; 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.
• 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 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)

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, 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 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
• Between annual updates, the brochure must be updated promptly whenever any information in it becomes materially inaccurate; a change in assets under management or fees alone does not force an interim 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 for discretionary advice delivered by a team of more than five supervised persons with no direct client contact
• 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 amendments are filed within 30 days and communicated to existing retail clients within 60 days after the amendment is required
• 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