17.3 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:

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 1A: Registration information, AUM, employees; Audience - Regulators (SEC/State)

Part 1B: State-specific information; Audience - State regulators only

Part 2A: Firm Brochure - narrative disclosure; Audience - Clients and prospects

Part 2B: Brochure Supplement - personnel info; Audience - Clients and prospects

Part 3: Form CRS (for dual registrants); Audience - Retail investors

Form ADV Part 2A - Firm Brochure

The brochure must disclose in narrative form:

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

Initial Delivery: Before or at the time of entering advisory contract

Annual Update: Within 120 days of fiscal year-end, if the brochure has materially changed (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 if the brochure has materially changed. Assignment of contracts requires client consent.

Key Takeaways

- Advisory contracts cannot be assigned without client consent

- Form ADV Part 2A (brochure) must be delivered before/at contract signing

- If the brochure has materially changed, deliver an update or summary to clients 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