Required Disclosures

Each disclosure obligation below answers a different question: what must be told, when must it be told, and through which channel. The exam tests these distinctions directly, especially the timing rules and the SAI-versus-prospectus delivery difference.

What Counts as a Material Aspect of an Investment?

• Representatives must disclose all material facts about a security or transaction that could affect the customer's investment decision
• Material information includes:
  • Risks associated with the investment
  • Fees and expenses
  • Conflicts of interest
  • Liquidity limitations
  • Relevant financial condition of the issuer
• Failure to disclose material information can constitute fraud under the Securities Exchange Act's antifraud provisions
• The standard is whether a reasonable investor would consider the information important in making a decision

Key Point: If a fact could influence an investor's decision, it is material and must be disclosed.

What Is the Statement of Additional Information (SAI)?

• The SAI is Part B of the mutual fund registration statement (the prospectus is Part A)
• Supplements the statutory prospectus with additional detail, including:
  • Financial statements
  • Portfolio holdings
  • Management details and compensation
  • Detailed fund policies and investment restrictions
  • Detailed tax information
• The investment objective and ticker symbol appear in the summary prospectus. The SAI may also discuss the objective as part of the fund's policies, and its cover includes the ticker symbol. The distinction is the level of detail, not that every topic appears in only one document.
• Not automatically delivered to investors; must be provided upon request at no charge
• The prospectus must reference the SAI's availability

The full statutory prospectus also provides more information than the summary prospectus. A general request for "more detail" does not by itself distinguish the statutory prospectus from the SAI. The SAI provides supplemental disclosures, such as detailed policies on borrowing money and making loans.

Exam Tip: Gotchas

• The SAI is NOT the prospectus. It supplements the prospectus with more detailed information. The key distinction: the prospectus IS delivered to investors; the SAI is only delivered upon request.

What Are Material Events, and When Must They Be Disclosed?

• Material developments can require investor disclosure when a reasonable investor would consider them important; formal municipal EMMA event notices follow specific listed categories and timing
• Examples of potentially material developments outside the municipal event-notice list:
  • Mergers and acquisitions
  • Consequential changes in executive management
  • Restatement of financials
  • Default or credit downgrade
  • Regulatory actions
  • Bankruptcy or restructuring

These general examples are not an automatic municipal EMMA filing list. A routine change in a municipality’s mayor or city council is not, by itself, one of the listed municipal event notices.

What Continuing Disclosure Applies to Municipal Securities?

• For municipal securities, issuers must file continuing disclosure under the SEC municipal-securities continuing-disclosure rule
• Annual financial information and material event notices are filed via EMMA (Electronic Municipal Market Access), the MSRB's centralized disclosure system
• Material event notices include:
  • Principal and interest payment delinquencies
  • Rating changes
  • Defeasances
  • Unscheduled draws on debt-service reserves reflecting financial difficulties
  • Bond calls (if material) and tender offers

Exam Tip: Gotchas

• EMMA is the MSRB's system, not the SEC's. Municipal continuing disclosure filings go through EMMA.
• Failure to disclose material events can constitute fraud under the Exchange Act's antifraud provisions.

When Must a Control Relationship Be Disclosed?

• A broker-dealer must disclose if it has a control relationship with the issuer of a security being recommended or sold
• Control means the power to direct or influence the management or policies of the issuer
• Examples:
  • The broker-dealer is an affiliate of the issuer
  • A principal of the firm sits on the issuer's board
  • The issuer and broker-dealer share common ownership
• This disclosure must be made before or at the time of the transaction
• Required under FINRA Rules to ensure the customer is aware of potential conflicts of interest

Exam Tip: Gotchas

• A broker-dealer selling securities of a company it controls (or is controlled by) must disclose this relationship. The timing is critical: disclose BEFORE or at the time of the transaction, not after.
• Material information is judged by the "reasonable investor" standard. If a reasonable investor would consider the information important, it must be disclosed.

What Should You Check on Exam Day?

• Materiality uses the reasonable-investor standard; if it could influence the decision, disclose it.
• The prospectus is delivered automatically; the SAI is delivered only on request.
• Municipal continuing disclosure runs through EMMA, the MSRB's system, not the SEC's.
• A control relationship must be disclosed before or at the time of the transaction, never after the fact.