Which of the following must be included in an investment advisory contract under NASAA rules?

What Is the Brochure Rule?

The brochure rule is a requirement under the Investment Advisers Act of 1940 that requires investment advisors to provide a written disclosure statement to their clients. The rule, officially known as rule 204-3, applies to all federally registered investment advisors and specifies times during the advisory process to provide the materials.

Key Takeaways

• The Investment Advisers Act of 1940 requires investment advisors to provide a written disclosure statement to their clients.
• Background information, disclosure of compensation, fees, and other items must be listed in the brochure document.
• New clients must receive the brochure document within 48 hours of signing an advisory contract.
• The U.S. Securities and Exchange Commission specifies two ways an advisor can meet the brochure rule.
• Advisors offering impersonal investment advice and are paid less than $500 per year do not have to adhere to the brochure rule with a client.

How the Brochure Rule Works

The U.S Securities and Exchange Commission specifies two ways in which an advisor can satisfy the brochure rule:
1) The advisor can provide such disclosure by giving the client Form ADV Part 2A (brochure) and Part 2B (brochure supplement).

2) The advisor can provide an actual brochure containing the same information found in Form ADV Part 2A and 2B.

What Is Included in the Brochure

The document must include the following information:

• Background information of the advisor
• Services available and the fees for those services, including available discounts
• Disclosure of any compensation received from third parties (such as commissions or referral fees)
• Whether the advisor exercises discretion over client funds
• Types of clients for whom advisory services are provided, including any minimum dollar amount of assets to be managed
• Disclosure of any affiliation with a broker-dealer
• Any material legal or disciplinary action that has occurred within the past 10 years
• Any financial condition of the advisor (such as bankruptcy) that might impair its ability to meet client commitments must also be disclosed if the advisor:
• Has discretion over client accounts
• Has custody of client money or securities
• Requires prepayment of more than $500 in fees, more than six months in advance

Your financial advisor should give you a brochure document every year if they meet the requirements for providing one.

Who Should Receive a Brochure

The brochure rule states that the required information must be provided to new clients at least 48 hours before entering into an advisory contract. Advisors must give existing clients a new brochure every year. Failure to provide the brochure is considered fraudulent behavior.

Special Considerations

SEC-registered advisors are not required to deliver a brochure to either (i) clients that are SEC-registered investment companies or business development companies; or (ii) clients who receive only impersonal investment advice from the advisor and who will pay the advisor less than $500 per year.

An SEC-registered advisor is not required to deliver a brochure supplement to a client (i) to whom it is not required to deliver a brochure, (ii) who receives only impersonal investment advice, or to (iii) certain officers and employees of the advisor itself.

An investment adviser has a fee structure that states:

Assets Under Management Annual Fee
0 - $1,000,000 2.00%
>$1,000,000 - $5,000,000 1.50%
>$5,000,000 - $10,000,000 1.00%
>$10,000,000 Negotiable With Client

Which statement is TRUE about such an arrangement?

A. This is prohibited under NASAA rules because it favor customers with more assets under management
B. This is prohibited because advisers cannot have negotiable fees
C. This is permitted as long as the negotiated fee is less than 1%
D. This is permitted without restriction

The best answer is C. Advisers may either take custody of client funds; or they may not take custody of client funds. As a general rule, advisers that take custody must post a higher net worth, must send out quarterly account statements, must keep customer funds or securities at a qualified custodian, and must be audited annually. Generally, acting as a trustee means that the trustee is managing assets for a beneficiary, and in doing so, has taken "custody." Note that broker-dealers are not subject to this rule - it is only for investment advisers. There are other SEC rules covering custody of client assets for broker-dealers.

Finally, having power of attorney or discretionary authority over an account limited to trading only does not mean that an adviser is taking custody because the adviser does not have access to client funds. In contrast, if the power of attorney were to allow the adviser to withdraw checks from the client account, then the adviser would have custody.

Arrange the following in proper sequence when opening a new account for a customer: I Completing the new account form
II Executing the first transaction
III The manager signing the new account form
IV Completing the order ticket for first order

A. I, II, III, IV
B. IV, I, II, III
C. I, IV, III, II
D. I, IV, II, III

What is included in an investment advisory contract?

Which of the following is not required to disclosed in an investment advisory contract under the Uniform Securities Act?

Which of the following is prohibited in an advisory contract under NASAA rules quizlet?

Which of the following is an acceptable investment advisory contract provision?