Client Agreements & Disclosure
Investment advisers must establish proper relationships with clients through written agreements and provide required disclosures. The Form ADV is the primary disclosure document for investment advisers.
Advisory Agreements
Required Elements
Every investment advisory agreement should include:
| Element | Description |
|---|---|
| Services Provided | Specific description of advisory services |
| Fee Schedule | How fees are calculated and billed |
| Duration/Termination | How long the contract lasts; termination procedures |
| Investment Authority | Whether discretionary or non-discretionary |
| Custody Arrangements | How and where client assets are held |
| Assignment Provision | Cannot assign without client consent |
| Arbitration Clause | If applicable, dispute resolution procedures |
Assignment of Contracts
Key Rule: An investment adviser cannot assign an advisory contract to another person without client consent.
What Constitutes Assignment?
- Direct sale of the advisory contract
- Change in controlling ownership of the adviser (more than 25%)
- Merger or reorganization changing control
What Does NOT Constitute Assignment?
- Internal reorganizations not changing control
- Adding new partners if control doesn't change
- Death or withdrawal of minority partner
Form ADV—The Disclosure Document
Form ADV is the primary registration and disclosure document for investment advisers.
Form ADV Structure
| Part | Purpose | Audience |
|---|---|---|
| Part 1A | Registration information, AUM, employees | Regulators (SEC/State) |
| Part 1B | State-specific information | State regulators only |
| Part 2A | Firm Brochure—narrative disclosure | Clients and prospects |
| Part 2B | Brochure Supplement—personnel info | Clients and prospects |
| Part 3 | Form CRS (for dual registrants) | Retail investors |
Form ADV Part 2A—Firm Brochure
The brochure must disclose in narrative form:
| Item | Disclosure Required |
|---|---|
| Advisory Business | Types of services offered, types of clients |
| Fees and Compensation | Fee schedule, how fees are calculated and collected |
| Performance-Based Fees | If charged, how they work |
| Types of Clients | Minimum account size, if any |
| Methods of Analysis | Investment strategies and risk of loss |
| Disciplinary Information | Material disciplinary events |
| Other Financial Industry Activities | Broker-dealer registration, insurance licenses |
| Code of Ethics | Summary of ethical policies |
| Brokerage Practices | Best execution, soft dollars, directed brokerage |
| Review of Accounts | Frequency and nature of reviews |
| Client Referrals | Compensation arrangements for referrals |
| Custody | If adviser has custody, safeguards |
| Investment Discretion | If adviser has discretion, any limitations |
| Voting Client Securities | Proxy voting policies |
| Financial Information | Balance sheet if required |
Form ADV Part 2B—Brochure Supplement
For each supervised person providing investment advice:
- Name and business address
- Educational background and business experience (past 5 years)
- Disciplinary information
- Other business activities
- Additional compensation arrangements
- Supervision structure
Delivery Requirements
| Timing | Requirement |
|---|---|
| Initial Delivery | Before or at the time of entering advisory contract |
| Annual Update | Within 120 days of fiscal year-end (summary of material changes or full brochure) |
| Material Changes | Promptly upon material disciplinary events (Item 9) |
| Upon Request | Must provide current brochure within reasonable time |
Electronic Delivery
Form ADV may be delivered electronically if:
- Client consents (express or implied)
- Client has access to retrieve the document
- Delivery method provides reasonable assurance of receipt
Privacy Notices (Regulation S-P)
Initial Privacy Notice
Must be provided to clients at account opening:
- Categories of information collected
- How information may be shared
- Security procedures
- Opt-out procedures if sharing with non-affiliates
Annual Privacy Notice
Must be delivered annually, UNLESS:
- No changes to privacy practices, AND
- No sharing with non-affiliated third parties (other than exceptions)
Opt-Out Rights
Clients have the right to opt out of:
- Sharing nonpublic personal information with non-affiliated third parties
- Does NOT apply to sharing with affiliates or for servicing the account
Safeguarding Customer Information
Advisers must adopt written policies to:
- Protect customer records and information
- Ensure security and confidentiality
- Protect against anticipated threats
- Guard against unauthorized access
On the Exam: Know the Form ADV delivery requirements: initial delivery before or at contract signing, annual summary of material changes within 120 days of fiscal year-end. Assignment of contracts requires client consent—this is frequently tested.
Key Takeaways
- Advisory contracts cannot be assigned without client consent
- Form ADV Part 2A (brochure) must be delivered before/at contract signing
- Annual update required within 120 days of fiscal year-end
- Privacy notices required at account opening and annually (with exceptions)
- Clients may opt out of information sharing with non-affiliates
An investment adviser must deliver Form ADV Part 2A to clients:
An investment adviser cannot assign an advisory contract without:
The annual summary of material changes to Form ADV Part 2A must be delivered to existing clients within:
17.4 Proxy Voting & Other Obligations
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