Unit 6 - Communication with Clients

Disclosure of Capacity by Investment Advisers

-The client receives full written disclosure as to the capacity in which the adviser proposes to act -Client consent is obtained (can be written or oral); may be obtained before or after the execution of the trade, but both must be done prior to the completion of the transaction -These rules do not apply if the IA is also registered as a BD and is acting as such (the transaction is not a result of a recommendation from the adviser)

Investment Advisory Contract Disclosures (State & Federal)

-services to be provided -term of the contract (can be of any length, but any renewals under state law must be in writing) -the amount of advisory fee or formula for computing the fee -amount or manner of calculation of the amount of any prepaid fee to be returned in the event of contract termination -whether the contract grants discretionary power -that no assignment of the contract may be made by the adviser without consent of the client -if the adviser is organized as a partnership, any change to a minority interest in the firm will be communicated within a reasonable period of time (the change to a majority of the partnership would be considered an assignment)

Exemptions from the Brochure Rule

2 exemptions under both federal & state law from the delivery requirements of the rule: -contracts with an investment company registered under the Investment Company Act of 1940 (Mutual Funds) are exempted because those contracts are covered by that act -advisers entering into a contract providing solely for impersonal advisory services (publishers of market letters) if the annual charge for the service is less than $500

Brochure Delivery Requirements for SEC-Registered Advisers

A firm brochure must be delivered to each client. It must be delivered even if the advisory agreement with the client is oral. The firm brochure must be given to each client before or at the time an advisory agreement is entered into with the client. Thereafter, annually, within 120 days of the end of the fiscal year, a free, updated brochure must be given to each client (only if there are material changes).

General Disclosure Requirements

All must be disclosed to current & prospective clients: -Material disciplinary action -Any & all fees the client will pay & whether they're negotiable -Affiliation with a BD or other securities professionals -Allocation policy -Any financial condition that is reasonably likely to impair the ability of the adviser to meet contractual commitments to those clients (for a state-registered adviser with discrectionary authority or requiring pre-payment of fees) -Any material legal action must be disclosed to prospective clients within 48 hours before entering into a contract or at the time of entering the contract if the client has the ability to terminate the contract without penalty within 5 business days

Brochure Delivery Requirements for State-Registered Advisers

Essentially the same as federal with one exception - advisers are required to deliver the brochure to the client at least 48 hours before entering into an advisory contract or at the time of entering the contract if the advisory client has the right to terminate the contract without penalty within 5 business days after entering into the contract.

Investment Adviser Brochure Rule

Form ADV Part 2 is a disclosure document that is required to be given to clients. It is in narrative format & plain english & items included are: -a description of the types of services provided -fees & compensation -methods of analysis, investment strategies & risk of loss -disciplinary info -how you select or recommend BDs for client transactions -custody practices -investment discretion

Typical BD Fees

Issuance of a stock certificate Transferring an account Wiring funds Margin interest account Account maintenance fees Safekeeping of funds/securities Late settlement fee Postage and handling

Part 2B - Brochure Supplement

Must contain certain info about "advisory personnel on whom clients rely for investment advice" Also in narrative format and plain english and includes 6 categories: Cover page, educational background & business experience, disciplinary info, other business activities, additional compensation, supervision

Disclosure of Conflicts of Interest

Potential conflicts of interest: -offering a proprietary product -offering a limited partnership offering (DPP) where the sponsor is an affiliate of the BD program sponsors providing incentives to agents for selling their products -a securities professional having a financial interest in any security being recommended -a BD going public & placing shares of its own stock into discretionary accounts -A BD publishing a favorable research report after underwriting the issuer's stock offering

Wrap Fee Program

Program under which a client is charged a specific fee not based directly on transactions in a client's account, for investment advisory services (which may include portfolio management or advice concerning the selection of other investment advisers) and for execution of client transactions. Buy and hold clients are generally not suitable for wrap fee programs because they don't do enough trading to benefit from the fact that commissions are included in the program

Agency Cross Transaction

The IA acts as agent for both its advisory client and the party on the other side of the trade. Both state & federal law permit this as long as the advisory client executes a written consent in advance authorizing the investment adviser to effect agency cross transactions for such clients and the adviser discloses certain info: -commissions, potential conflict of interest, the arrangement may be terminated at any time, etc. The adviser may not recommend the transaction to both parties of the trade.

Investment Advisory Contract Differences Between Federal & State Law

The USA prohibits entering into, extending, or renewing any advisory services, unless the contract is in writing, while federal law permits the contract to be written or oral. The USA requires that fees be competitive with federal law only requires that they be reasonable in view of the services rendered. The NASAA Model Rule on performance-based compensation is a bit more stringent than SEC.

Misrepresenting Registration of a Securities Professional

What can you say once you've registered? You are a registered agent of ABC Broker-Dealer or a registered investment advisor representative of XYZ Investment Adviser.

Guaranteed Security

Where a party other than the issuer guarantees the payment of principal and interest (on a debt security) or dividend (on an equity security). There is no guarantee on the performance of the investment.

Not included in the fee disclosure documents

commissions; markups and markdowns; advisory fees