Brochure Rule

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, officially known as rule 204-3, applies to all federally registered investment advisers and specifies times during the advisory process at which they must provide the materials.

The U.S Securities and Exchange Commission specifies two ways in which an adviser can satisfy the brochure rule:
1) The adviser can provide such disclosure by giving the client Form ADV Part 2A (brochure) and Part 2B (brochure supplement).
2) The adviser can provide an actual brochure that contains the same information that would be found in Form ADV Part 2A and 2B.

The document must include the following information:

• Background information of the adviser
• Services available and the fees for those services, including available discounts
• Disclosure of any compensation received from third parties (such as commissions or referral fees)
• Whether the adviser exercises discretion over client funds
• Types of clients for whom advisory services are provided, including any minimum dollar amount of assets to be managed
• Disclosure of any affiliation with a broker-dealer
• Any material legal or disciplinary action that has occurred within the past 10 years
• Any financial condition of the adviser (such as bankruptcy) that might impair its ability to meet client commitments must also be disclosed if the adviser:
  • Has discretion over client accounts
  • Has custody of client money or securities
  • Requires prepayment of more than $500 in fees, more than six months in advance

The brochure rule states that the required information must be provided to new clients at least 48 hours before entering into an advisory contract. Advisers must give existing clients a new brochure every year. Failure to provide the brochure is considered fraudulent behavior.

SEC-registered advisers are not required to deliver a brochure to either (i) clients that are SEC-registered investment companies or business development companies; or (ii) clients who receive only impersonal investment advice from the adviser and who will pay the adviser less than $500 per year.

An SEC-registered adviser is not required to deliver a brochure supplement to a client (i) to whom it is not required to deliver a brochure, (ii) who receives only impersonal investment advice, or to (iii) certain officers and employees of the adviser itself.