Every advisory relationship starts with disclosure. Before an adviser can manage money or provide recommendations, the client must understand who they're working with, what it will cost, and what conflicts exist.
The Disclosure Obligation
- Investment advisers and broker-dealers must provide full and fair disclosure of all material facts to clients and prospects
- Material information is anything a reasonable investor would consider important in making an investment decision
- Disclosure must occur before or at the time of the transaction or advisory relationship, not after
Exam Tip: Gotchas
- Disclosure timing is always "before or at the time of." The exam tests whether disclosure happens before, during, or after. The answer is never "after."
What Must Be Disclosed
| Category | Examples |
|---|---|
| Fees and compensation | Fee schedule, how fees are calculated, billing method |
| Conflicts of interest | Dual registration, revenue sharing, proprietary products |
| Disciplinary history | Regulatory actions, criminal history, civil proceedings |
| Investment risks | Material risks of the strategy or specific securities |
| Financial condition | If the adviser's financial condition could impair its ability to meet obligations |
Form ADV Part 2A (The Brochure)
- Form ADV Part 2A is the primary disclosure document for investment advisers
- Written as a narrative brochure in plain English (not a fill-in-the-blank form)
- Contains 18 required disclosure items covering advisory services, fees, conflicts, disciplinary history, and more
Key delivery rules:
- Must be delivered to each client before or at the time of entering an advisory agreement
- Annual amendment filed with regulators: within 90 days of the adviser's fiscal year-end (regulatory filing obligation)
- Annual brochure delivered to existing clients: within 120 days of the adviser's fiscal year-end (client delivery obligation)
- Annual update must include a summary of material changes or an offer to provide the updated brochure
Exam Tip: Gotchas
- Form ADV Part 2A is the brochure. It is a narrative document in plain English. Part 1 is the fill-in-the-blank form filed with regulators.
- Two deadlines, not one. Filing the annual amendment with regulators: 90 days. Delivering the updated brochure 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 answer on client delivery questions.
Omissions Are Violations
- Omitting a material fact is just as much a violation as making a false statement
- Lying is not required to commit fraud. Simply leaving out important information can be fraudulent
- This applies to both investment advisers and broker-dealers
Exam Tip: Gotchas
- Omission = misstatement. Failing to disclose a material fact carries the same legal weight as making a false statement.