Brochure Delivery Requirements

Part 2A of the Form ADV requires advisers to create narrative brochures containing information about the advisory firm. Both federal and state registered advisers must prepare and deliver a brochure to their clients according to the brochure delivery requirements set in 17 CFR § 275.204-3 – Delivery of brochures and brochure supplements.

Delivery Requirements for SEC Registered Advisers

A firm brochure must be delivered to each client before or at the time an advisory agreement is entered into with a client, and it must be delivered even if the advisory agreement with the client is oral. Thereafter, each year, within 120 days of the end of the fiscal year, a free, updated brochure must be delivered to each client that either includes a summary of material changes or is accompanied by a summary of material changes, or alternatively, it would be permitted to deliver to each client a summary of material changes that includes an offer to provide a copy of the updated brochure and information on how a client may obtain the brochure.

Although the brochure must be updated promptly when something becomes materially inaccurate, the only tie that an interim amendment must be delivered to clients is when there is a disciplinary action. The interim amendment can be in the form of a document describing the material facts relating to the amended disciplinary event.

Delivery Requirements for State Registered Advisers

The brochure delivery requirements for state registered adviser are essentially the same as that for federal covered advisers with one very important exception. Under the NASAA Model Rule on adviser brochures, 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 into an advisory contract if the advisory client has the right to terminate the contract without penalty within five business days after entering the contract. Some advisers charge a startup or setup fee. Any new client who does not receive a brochure at least 48 hours before entering into an advisory agreement may terminate the agreement and be refunded the setup fee. However, it would not be considered a penalty for the adviser to make a pro-rata charge for management services rendered during that five-business day period.

Delivery of the Brochure Supplements

Initially and annually, the investment adviser must deliver to a client the brochure supplements for each supervised person who provides advisory services to that client. However, there are three categories of clients to whom the investment adviser is not required to deliver supplements.

  1. Clients to whom the investment adviser is not required to deliver a firm brochure (Part 2A) or a wrap fee program brochure (Appendix 1 to Part 2A). The logic here is that because the supplement is a supplement to the brochure, if there is no brochure, why would there be a supplement?
  2. Clients who receive only impersonal investment advice, even if they receive a firm brochure. An example of this would include those paying $500 or more per year for a subscription.
  3. Individual clients who are any executive officers, directors, trustees, general partners, or people serving in a similar capacity, of that firm; or any employees of that firm (other than employees performing solely clerical, secretarial, or administrative functions) who, in connection with regular functions or duties, participate in the investment activities of that firm an have been performing such functions or duties for at least 12 months.

Exemptions from the Brochure Rule

There are two exemptions under both state and federal law from the delivery requirements of the rule.

  1. Contracts with a registered investment company are exempted. Section 15 of the Investment Company Act of 1940 requires investment advisers to furnish information to the board of directors of a registered investment company to enable the board to evaluate the terms of the proposed contract. As long as the contract meets those requirements, the SEC thought it unnecessary to require the adviser to deliver a brochure to the investment company.
  2. Advisers entering into a contract providing solely for impersonal advisory services-that is, publishers of market letters-are exempt from the rule’s initial delivery requirements. If the annual charge for this service is $500 or greater, delivery of the brochure must be offered with the same two timing options listed above.

For more information on the Form ADV brochure, Check out our Part 2A of Form ADV: Firm Brochure Blog from last week and our Updating the Brochure blog being posted next week.

MasterCompliance provides expert consulting, outsourcing, and implementation tools in planning and budgeting your firm’s compliance responsibilities. If there are any areas where you would like to explore additional assistance or services, please contact us.