Rule 204-3, the brochure rule, is a requirement under the Investment Advisers Act of 1940 that requires investment advisers to provide a written disclosure statement to their clients. The rule applies to all federally registered investment advisers and specifies times during the advisory process at which they must provide the materials. To satisfy this rule, adviser can either provide clients Part 2 of the Form ADV, or they can provide an actual brochure that contains the same information that would be found in Form ADV Part 2A and 2B.
Part 2 of the Form ADV consists of:
- Form ADV Part 2A: Firm Brochure
- Part 2A Appendix 1 of Form ADV: Wrap Fee Program Brochure
- Form ADV Part 2B: Brochure Supplement describing certain supervised persons.
This blog will cover Part 2A of Form ADV: Firm Brochure, for more information on Form ADV, check out our Form ADV blog now, or our Part 2A Appendix 1 of Form ADV: Wrap Fee Program Brochure and Part 2A of Form ADV: Firm Brochure blogs being posted soon.
The cover page of the brochure must state the name, business address, contact information, website address, and the date of the brochure. The cover page must also include this statement, or another one that clearly and concisely conveys the same information:
This disclosure brochure provides information about the qualifications and business practices of [Insert Firm Name]. If you have any questions about the contents of this disclosure brochure, please contact [Insert Contact Name and Phone Number/Email Address]. The information in this disclosure brochure has not been approved or verified by the United States Securities and Exchange Commission or by any state securities authority.
Part 2 of the Form ADV consists of a series of items that contain disclosure requirements that the adviser must respond to in a narrative format. The adviser must respond to every item as they appear in Part 2 with the heading for each item immediately preceding the response. If an item in Part 2 does not apply to an adviser’s business, they need to indicate that the item is not applicable.
The items in Part 2 of the Form ADV are designed to promote effective communication between the adviser and their clients.
The SEC has identified common problems with the language used in disclosure documents:
- Long sentences
- Passive voice
- Weak verbs
- Superfluous words
- Legal and financial jargon
- Numerous defined terms
- Abstract words
- Unnecessary details
- Unreadable design and layout
To abide by the plain English requirement, when drafting the brochure and the brochure supplements advisers should:
- Use short sentences;
- Use definite, concrete, everyday words;
- Avoid legal jargon or highly technical business terms unless you explain them or believe clients will understand them;
- Use active voice;
- Use tables or bullet lists for complex material, whenever possible; and
- Avoid multiple negatives.
For the full guide, check out the SEC’s “A Plain English Handbook How to Create Clear SEC Disclosure Documents”
The brochure and the brochure supplements must be filed through the Investment Adviser Registration Depository (“IARD”) system. Federally covered advisers or advisers in the process of registering with the SEC do not have to file their brochure supplements through the IARD system, but they are required to maintain a copy which can be made available upon the request of the SEC. Advisers registered with or in the process of registering with one or more state securities authorities must file a copy of their brochure supplement for each registered person doing business in that state.
For more related information, check out our blogs on investment adviser registration: When Do You Have to Register as an Investment Advisor?, Exclusions from the Definition of Investment Advisor, Federal Exemptions from Investment Advisor Registration, and more.
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.