This information must be available to customers. In practice, many firms include fee schedules in account applications and post them on their websites.
Agents representing broker-dealers must create an order ticket for each order they place. The order ticket creates a historical record of the trade and includes key details such as:
After an order ticket is submitted, the agent’s supervisor must review it “promptly,” which typically means by the end of the day. This review helps confirm the order was entered correctly.
The supervisor (often called the principal) can update the order ticket if there’s a mistake. Even if the agent notices the error first, the principal must approve any changes made to the ticket.
Agents may also encounter situations where a customer wants to place an unsuitable order. For example, a retired customer with limited resources may want to buy a very risky stock. Financial professionals should explain the risks involved. However, if the customer insists on placing the order, the order must be placed. Ultimately, the customer controls their finances and securities transactions.
In these situations, it’s a best practice for agents to document the discussion. Firms maintain files on each customer that include transaction history and notes from prior interactions. If a customer’s expectations are unrealistic and they lose significant money, these notes can help address liability questions. If the trade resulted from a recommendation, the firm could be held liable if the trade was unsuitable.
Investment adviser disclosures
The most important disclosures made by an investment adviser are typically presented in the brochure. Here are the three key sections of this disclosure document:
The purpose of these disclosures is to help clients understand the person they’re trusting with their money. These documents describe the products and services offered and also provide information about the firm and its investment adviser representatives (IARs). If the adviser has a checkered past, or employs an IAR with a criminal record, that information can be found in the brochure.
“Solicitor” means any individual, person, or entity who, directly or indirectly, receives a cash fee or any other economic benefit for soliciting, referring, offering or otherwise negotiating for the sale or selling of investment advisory services to clients on behalf of an investment adviser.
In other words, a solicitor is anyone who is compensated for connecting potential clients with an adviser. A solicitor might be an employee of the adviser, or a separate third party. For example, someone with a marketing background might network locally and refer prospective clients to an adviser.
This arrangement is legal and ethical as long as required protocols are followed and disclosures are made. Under the rules for solicitors of state-registered advisers, the solicitor:
Obtains signed receipt of brochures from a prospective client
Be registered as an IAR
This requirement is straightforward: the solicitor must be registered as an IAR of the firm they’re soliciting business for.
Not be subject to a statutory disqualification
Promoters are treated like other financial professionals. If they’re subject to a statutory disqualification, they can’t solicit on behalf of an adviser. We covered statutory disqualifications in a previous chapter. These are past actions or sanctions that prevent a person from becoming registered (effectively barring them from the industry). A person is statutorily disqualified if they are:
Subject to denial, suspension, or revocation by any securities regulator
Any felony or securities-related misdemeanor conviction in the past 10 years
Subject to any injunction or other court-related order prohibiting work in the securities industry
Has filed a registration application with inaccurate or false information
Has willfully violated a securities act (e.g. Uniform Securities Act, Investment Advisers Act of 1940)
Maintains a written agreement with the adviser
Solicitor regulations require a written agreement between the adviser and the promoter. The adviser must keep this agreement in its records, and the state administrator may request it. The agreement must describe:
The solicitation activities the solicitor will be engaged in
How the adviser will ensure all applicable laws and regulations will be followed
Must deliver brochures
When soliciting a prospective client, the solicitor must deliver two brochures.
The adviser must provide Form ADV Part 2A (the adviser’s brochure) in writing.
The solicitor must also provide a separate solicitor’s brochure in writing.
The solicitor’s brochure must disclose:
Name of the solicitor and the adviser they’re soliciting for
Nature of the relationship between the solicitor and the adviser
A statement confirming the solicitor is being compensated for their services
Terms and description of the compensation to be received by the solicitor
Disclosure if the client will be charged a higher fee than normal to compensate the solicitor
Obtains signed receipt of brochures from a prospective client
After delivering both brochures, the promoter must obtain a signed receipt from the prospective client confirming the disclosures were received. The investment adviser must maintain the signed receipt in its records.
Solicitors for federal-covered advisers
Prior to 2020, solicitor rules for federal-covered advisers were essentially the same as state rules. In 2020, the Securities and Exchange Commission (SEC) finalized a new rule that simplified how solicitors are regulated. You’ll notice some overlap with the state requirements.
The solicitor must disclose:
If they’re a client of the adviser
If they’re being compensated and, if so, how much
Any conflicts of interest related to their relationship with the adviser
Additionally, these rules must be followed:
A written agreement must exist between the adviser and solicitor*
The solicitor may not be subject to any statutory disqualification
*Essentially the same items that must be in the agreement between a state-registered adviser and their solicitor (discussed above) are the same here.
Last, the solicitor may not*:
Make an untrue, inaccurate, or misleading statement
Discuss potential benefits without discussing potential risks
Reference the adviser’s recommendations in a way that is not fair and balanced
Present the adviser’s performance in a way that is not fair and balanced
*Although these prohibitions are specifically for solicitors of federal-covered advisers, you can assume the same applies at the state level.
Two major items from the state-based solicitor rule are omitted here:
Solicitors are not required to be registered as IARs.
There is no brochure delivery requirement for promoters.
Because the adviser must provide the brochure to the client, the SEC viewed a separate requirement for the solicitor to deliver it as redundant. As discussed above, the promoter must still make disclosures at the time of solicitation. The SEC rule says these disclosures must be made “clearly and prominently,” but it does not explicitly require them to be in writing.
Access person disclosures
Securities rules and regulations have increasingly emphasized transparency in investment advice. One key concern is whether an IAR’s personal holdings could influence recommendations to clients.
For example, suppose an IAR owns stock in a thinly traded company. Because additional demand could raise the market price, the IAR recommends the stock to multiple clients - even if it isn’t fully suitable. That creates an obvious conflict.
Rules for both federal-covered and state-registered advisers are designed to reduce this risk. Employees of advisers (typically IARs) who have access to certain nonpublic information must regularly disclose their personal securities holdings to their compliance departments.
These disclosure rules apply only to access persons.
As noted above, most (if not all) IARs of a registered adviser qualify as access persons because they can access client accounts, portfolio holdings, and recommendation details. To support transparency, regulators require access persons to disclose their personal holdings and transactions to their firms. Compliance staff can then compare client recommendations against the access person’s personal trading.
Access persons must file two types of reports:
Holdings reports
Transaction reports
Holdings reports
A holdings report provides a detailed snapshot of an access person’s personal portfolio, including:
Securities owned by the access person
Name of broker, dealer, or bank where the portfolio is held
The date the holdings report is submitted
Holdings reports must be filed:
No later than 10 days after the person becomes an access person, and the information must be current as of a date no more than 45 days prior to the date the person becomes an access person
At least once each 12-month period thereafter on a date selected by the investment adviser, and the information must be current as of a date no more than 45 days prior to the date the report was submitted
Transaction reports
Transaction reports disclose personal securities transactions. They must include:
Date of the transaction
Security traded and any relevant details (e.g. number of shares)
Nature of the transaction (e.g. buy, sale, short sale)
Price the security was traded at
Name of the broker, dealer, or bank performing the transaction
The date the transaction report was filed
Transaction reports must be filed no later than 30 days after the end of the quarter in which the transactions occurred.
Regulators provide three exceptions to the holdings and transaction report requirements. No filing is required for:
Activity in which the access person had no direct or indirect control over
For example, the access person is a beneficiary of a trust account owning and trading securities, which is managed by a separate third-party trustee
Transactions related to an automatic investment plan
For example, dividends received from a mutual fund that are automatically reinvested
Transactions the adviser has direct access to
For example, an IAR maintains an account with their employing adviser’s affiliated broker-dealer (the adviser can access this account at any time)
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