Required Disclosures to Clients

Lesson

Investment advisers must provide certain disclosure to their clients.

Practice Question #1

Which form is the primary disclosure document that investment advisers must file with the SEC and provide to clients?

A) Form ADV

B) Form U4

C) Form BD

D) Form CRS

Select an option above to see an explanation here.

A) Form ADV is the primary disclosure document for investment advisers. B) Form U4 is the registration form for broker-dealers and their registered representatives. C) Form BD is the registration form for broker-dealers. D) Form CRS is a client relationship summary required for broker-dealers and investment advisers.

Terms

Disclosure:: Providing information to clients or prospects about an investment adviser's business practices, conflicts of interest, and other relevant information.
Form ADV:: The primary disclosure document investment advisers must file with the SEC and provide clients.
Brochure Rule:: An SEC rule requiring investment advisers to provide clients with a written disclosure statement (Form ADV Part 2) containing specific information about the adviser's business practices.
Conflict of Interest:: An investment adviser's personal or professional interests may compromise their ability to act in the best interests of their clients.
Privacy Policy:: A document outlining how an investment adviser collects, uses, and protects client information.

Practice Question #2

What is the Brochure Rule?

A) A rule requiring investment advisers to provide clients with a written disclosure statement containing specific information about the adviser's business practices.

B) A rule requiring investment advisers to disclose their privacy policies to clients.

C) A rule requiring investment advisers to disclose their conflicts of interest to clients.

D) A rule requiring investment advisers to provide clients with a list of recommended investments.

Select an option above to see an explanation here.

A) The Brochure Rule requires investment advisers to provide clients with a written disclosure statement (Form ADV Part 2) containing specific information about the adviser's business practices. B) Disclosing privacy policies is a separate requirement. C) Disclosing conflicts of interest is part of the Brochure Rule, not the entire rule. D) Providing a list of recommended investments is not a required disclosure.

Historical Example

In the early 2000s, a major investment firm was found to have failed to disclose conflicts of interest to its clients. This led to a significant loss of trust in the firm and ultimately resulted in a multi-million dollar settlement with the SEC.

Practice Question #3

What is a wrap fee program?

A) A program in which an investment adviser bundles various services for a single fee.

B) A program in which an investment adviser refers clients to other professionals for a fee.

C) A program in which an investment adviser provides ongoing investment advice for a flat fee.

D) A program in which an investment adviser charges clients based on the performance of their investments.

Select an option above to see an explanation here.

A) A wrap fee program is in which an investment adviser bundles various services, such as investment advice, brokerage services, and research, for a single fee. B) Referring clients to other professionals for a fee is a solicitor arrangement. C) Providing ongoing investment advice for a flat fee is a type of fee structure but not a wrap fee program. D) Charging clients based on the performance of their investments is a performance-based fee arrangement.

Real-World Example

An investment adviser may have a relationship with a mutual fund company that provides the adviser with financial incentives to recommend the company's funds to clients. This conflict of interest must be disclosed to clients so they can make informed decisions about their investments.