Brochure Rule - Explained
What is the Brochure Rule?
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Table of ContentsWhat is the Brochure Rule?How Does the Brochure Rule Work?Who Should Receive a BrochureExceptions to the Brochure RuleAcademic Research on Brochure Rule
What is the Brochure Rule?
The brochure rule states that investment advisers and brokers registered under the federal or state authority must provide a written disclosure statement to their client before transacting with them. This statement contains the basic information about the services offered by investment advisors, their terms and conditions. The brochure rule is one of the regulations of the Securities and Exchange Commission (SEC) for investment advisers. This rule is contained in the Investment Advisers Act of 1940, it is otherwise carried the rule 204-3.
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How Does the Brochure Rule Work?
The rule 204-3 or the brochure rule is legally binding to all investment advisers registered by the state or federal authorities. This rule stipulates that an easy to understand material such as a brochure containing the services, terms, and conditions of an investment adviser must be provided to all clients. It is a full disclosure statement in the written form offered to prospective clients. The rule 204-3 also stipulates the time investment advisers must provide the material. There are two ways to provide a full disclosure statement under the brochure rule, they are through;
- Giving the client Form ADV Part 2A (brochure) and Part 2B (brochure supplement), or by
- Giving an actual brochure that contains the same information as Form ADV Part 2A and 2B.
The basic information that a brochure must contain include the following;
- Background information about the investment adviser or broker.
- Service terms, fees charged, and available discounts.
- Referral fees that clients can enjoy if there is any.
- The types of services the adviser provides.
- The type of clients the services are offered to and the minimum dollar amount that can be managed.
- The discretionary power that the adviser holds over the client's funds or custody over the client's securities.
- Factors that could cause a change in investment policies during the lifetime of an investment.
- Other brokers or advisers the adviser is affiliated with.
Generally, the brochure must contain all the needed information about an investment or advisory service needed by clients.
Who Should Receive a Brochure
All the prospective clients of a registered investment adviser is entitled to a brochure. The existing clients must also receive a new brochure annually which contains updates or possible changes that have occurred during the space of one year. According to the brochure rule, all new clients must receive the brochure of an investment adviser at least 48 hours before they enter into a contractual agreement with the adviser. Any adviser that fails to provide the brochure is deemed fraudulent and this act is punishable by the SEC.
Exceptions to the Brochure Rule
Although the brochure rule mandates investment advisers to issue a brochure containing basic information about the services they offer and other terms and conditions to prospective, there are exceptions to this rule. Registered advisers do not need to give the following clients a brochure;
- A client in form of a SEC-registered investment company.
- A client who will pay the SEC-registered adviser less than $500 in a year.
- A client that receives only impersonal advisory services from the registered adviser.
- Certain officers and employees.