Rule 204-3, the 48-Hour and Five-Business-Day Tests, Annual Delivery and the Narrow Exceptions

The brochure rule is the requirement that an investment adviser give each client a written disclosure document, known as the brochure, before or at the time the client signs an advisory contract. For advisers registered with the Securities and Exchange Commission, the rule is Rule 204-3 under the Investment Advisers Act of 1940.

The brochure is Part 2A of Form ADV, and it is supported by brochure supplements on the individual advisers, which make up Part 2B. Together they tell a client what the firm does, what it charges, how its people are qualified and where its interests may conflict with the client’s.

This guide covers what the rule requires, when the brochure must be delivered, the annual delivery obligation, the exceptions, how state rules differ, worked examples, the exam traps and five practice questions. For the full picture of the form the brochure belongs to, FRC’s guide to what Form ADV is explains all three parts.

Why the Brochure Rule Exists

An investment adviser is a fiduciary, and a fiduciary must make full and fair disclosure of all material facts. A client cannot give informed consent to a conflict of interest, or judge whether advice is objective, without knowing how the adviser is paid and what pressures it faces.

The brochure rule turns that principle into a specific, enforceable requirement. Instead of leaving disclosure to each adviser’s discretion, it sets out what must be said, in what format and when it must reach the client.

The rule also protects advisers. A firm that delivers a clear, accurate brochure on time has a documented record that the client was told about fees, risks and conflicts before agreeing to the relationship.

Where This Topic Appears on the Exams

The brochure rule appears in the laws and regulations section of the Series 65, alongside Form ADV, books and records and other adviser obligations. Questions test the delivery timing, the annual requirement, the exceptions and the difference between the SEC and state approaches.

FRC’s Series 65 Exam Preparation course covers the brochure rule and adviser disclosure obligations in detail, and the exam requires no sponsor. The SIE Examination Preparation course introduces the regulators and disclosure duties behind these rules.

Every FRC course can be spread across interest-free monthly payments, so cost is no reason to delay. The brochure rule comes down to a handful of timings and exceptions, and knowing them precisely is worth several marks.

What the Brochure Contains

The brochure is a plain-English narrative organised into 18 required items. They cover the firm’s advisory business, fees and compensation, performance-based fees, types of clients, methods of analysis and risk of loss, and disciplinary information.

The later items cover other financial industry activities, the code of ethics, brokerage practices, review of accounts, client referrals and other compensation, custody, investment discretion, voting of client securities and financial information. Many of them exist specifically to bring conflicts of interest into the open.

Since the SEC rewrote the rule in 2010, the brochure has been a readable narrative rather than a check-the-box form. The aim is for a client to be able to understand it without specialist knowledge.

The Brochure Supplement

The brochure supplement, Part 2B, gives information about the individuals who advise the client. It covers each person’s educational background and business experience, disciplinary information, other business activities, additional compensation and supervision.

A client must receive a supplement for each supervised person who formulates investment advice for that client and has direct contact with them. A supplement is also required for anyone who makes discretionary investment decisions for the client’s assets, even without direct contact.

Where advice is given by a team of more than five people, the adviser only needs to deliver supplements for the five with the most significant responsibility for the client’s account. This keeps the disclosure focused on the people who actually shape the advice.

When the Brochure Must Be Delivered

Under Rule 204-3, an SEC-registered adviser must deliver its brochure to a client before or at the time it enters into an advisory contract. The relevant supplements must be delivered at the same time, or before a supervised person begins to provide advice to that client.

Delivery can be in paper or electronic form. Electronic delivery is permitted where the client has agreed to it and the adviser follows the SEC’s guidance on electronic communications, so the client can access, retain and print the document.

Many advisers deliver the brochure alongside the advisory agreement and Form CRS, the relationship summary for retail investors. Form CRS must also be delivered before or at the time the relationship begins, so the three documents usually travel together.

The State Approach: 48 Hours or Five Business Days

Many states follow the model rule adopted by NASAA under the Uniform Securities Act, which sets a stricter timing test. The adviser must deliver the brochure at least 48 hours before entering into the contract.

Alternatively, the adviser can deliver the brochure at the time the contract is signed, as long as the client has the right to terminate the contract without penalty within five business days. Either route gives the client time to read the brochure before being bound.

This 48-hour and five-business-day test appears regularly on the Series 65. Candidates should know it applies under the state rules, while the SEC rule simply requires delivery before or at the time of contracting.

The Annual Delivery Requirement

Disclosure does not end once the client has signed. Each year, within 120 days after the end of the adviser’s fiscal year, the adviser must deliver to every client a summary of material changes made to the brochure since the last annual update.

The adviser can meet this requirement in one of two ways. It can deliver a complete updated brochure that includes the summary of material changes, or it can deliver the summary on its own together with an offer to provide the full brochure free of charge.

If there have been no material changes since the last annual update, no annual delivery is required. The adviser must still file its annual updating amendment to Form ADV within 90 days of its fiscal year end.

Interim Updates and Disciplinary Changes

The brochure must be updated promptly whenever any information in it becomes materially inaccurate. A change of fee structure, a new conflict of interest or a change of ownership are typical examples.

Most interim updates do not have to be delivered to existing clients straight away. The exception is disciplinary information, where the adviser must promptly deliver the amended brochure, or a statement describing the new disciplinary event, to its clients.

The same applies to supplements. If a supervised person becomes subject to a new disciplinary event, the clients that person advises must promptly receive an updated supplement or a statement describing the change.

Exceptions to Brochure Delivery

The SEC rule includes a small number of exceptions. An adviser does not have to deliver a brochure to a client that is a registered investment company or a business development company, provided the advisory contract meets the approval requirements of the Investment Company Act.

An adviser also does not have to deliver a brochure to a client who receives only impersonal investment advice and pays less than $500 a year. Impersonal advice is advice that does not purport to meet the objectives or needs of a specific individual, such as a general market newsletter.

Supplements are not required for clients receiving only impersonal advice, or for clients who are themselves certain officers or employees of the adviser. Candidates should note that these exceptions are narrow, and a typical individual client always receives both documents.

The Wrap Fee Program Brochure

Advisers that sponsor wrap fee programs must prepare a separate wrap fee program brochure, known as Part 2A Appendix 1. A wrap fee program bundles advisory services and brokerage execution into a single fee, typically based on the assets in the account.

The wrap fee brochure explains the services covered, the fee and how it compares with paying for the services separately, how portfolio managers are selected and the conflicts the sponsor faces. It replaces the standard brochure for clients in the program.

Wrap fee clients still receive supplements for the people advising them. The delivery and annual update rules work in the same way as for the standard brochure.

Record Keeping for the Brochure

Under the books and records rule, Rule 204-2, an adviser must keep a copy of each brochure and supplement, and each amendment or revision. It must also keep a record of the dates on which each brochure and supplement was given or offered to each client.

These records are how an adviser proves compliance during an SEC or state examination. An adviser that cannot show when a client received the brochure will find it hard to show that it met the rule.

The compliance program rule, Rule 206(4)-7, requires advisers to have written policies covering disclosure. Most compliance teams treat brochure delivery as a standard step in client onboarding and an annual checklist item.

Worked Example: SEC-Registered Adviser Onboarding

An SEC-registered adviser meets a new client on a Monday and agrees to manage a $600,000 portfolio. At the signing meeting, the adviser hands over the brochure, the supplement for the representative who will manage the account and Form CRS.

Delivery at the time of contracting meets Rule 204-3. The adviser records the date of delivery in its client file.

Had the client asked to read the brochure first, the adviser could have emailed it the week before. Either approach complies, as long as the brochure reaches the client no later than the signing.

Worked Example: State-Registered Adviser

A state-registered adviser in a state that follows the NASAA model rule meets a new client and wants to sign the contract the same day. It hands over the brochure at the meeting and includes a clause giving the client five business days to cancel without penalty.

That meets the state rule. Without the cancellation right, the adviser would have had to deliver the brochure at least 48 hours before the contract was signed.

If the client cancels on day four, the adviser cannot charge a penalty. It may only keep any fee earned for services actually provided, according to the contract terms and state rules.

Worked Example: Annual Delivery

An adviser’s fiscal year ends on December 31. During the year, it changed its fee schedule and added a new affiliated broker-dealer, both material changes.

By the end of April, within 120 days of year end, it sends every client a summary of these changes with an offer to provide the full updated brochure. It files its annual updating amendment to Form ADV by the end of March, within 90 days.

The following year, nothing material changes in the brochure. The adviser still files its annual amendment, but no annual delivery to clients is required.

The Exam Traps

The first trap is the timing difference between the SEC and the states. The SEC rule requires delivery before or at the time of contracting, while the state model rule requires 48 hours in advance, or delivery at signing with a five-business-day right to cancel.

The second trap is confusing the 90-day and 120-day deadlines. The annual Form ADV amendment is filed within 90 days, while the summary of material changes goes to clients within 120 days.

The third trap is forgetting the supplement, which must be delivered alongside the brochure for each person advising the client. The fourth trap is overstating the exceptions, which apply only to investment companies, business development companies and impersonal advice clients paying less than $500 a year.

FRC’s guide to Series 65 ethics and laws questions and exam traps covers more traps in this area. For the full list, see FRC’s guide to Series 65 exam traps and common mistakes.

A Memory Aid

Remember “SEC at signing, states 48 or 5.” That covers the two initial delivery tests.

For the annual cycle, remember “90 to file, 120 to tell.” The Form ADV amendment goes to regulators within 90 days, and the summary of material changes goes to clients within 120 days.

Practice Questions

Question one: under the SEC’s brochure rule, when must an adviser deliver its brochure to a new client? Before or at the time the advisory contract is entered into.

Question two: under the typical state rule, an adviser delivers the brochure at the signing meeting. What must the contract include? A right to terminate without penalty within five business days.

Question three: within how many days of fiscal year end must an adviser deliver a summary of material changes to clients? 120 days.

Question four: an adviser’s lead portfolio manager becomes subject to a disciplinary action. What must the firm do? Promptly deliver an updated supplement or a statement describing the event to affected clients.

Question five: a client receives only a general market newsletter for $300 a year. Must the adviser deliver a brochure? No, impersonal advice for less than $500 a year is an exception under the SEC rule.

Related Questions

The brochure is the main way an adviser discloses its conflicts of interest. FRC’s guide to what conflicts of interest an investment adviser must disclose explains which conflicts must appear and how they are described.

Get Exam-Ready

Brochure rule questions reward candidates who know the timings and the narrow exceptions. Once the SEC and state delivery tests and the annual cycle are clear, these questions become some of the most dependable marks on the exam.

The FRC dictionary is more than a dictionary. It is a library of explainer videos, written explanations and on-page quizzes covering the FINRA and SEC rules you are tested on, so you can open any term and go deeper whenever a question catches you out.

Study With FRC

FRC’s programs and memberships are open to everyone. Whether you are preparing for the Series 65, the SIE or both, structured exam preparation turns topics like adviser disclosure into marks you can rely on.

FRC’s Professional Membership adds verified progress and a Digital Profile, so when you apply for roles, employers can see your exam progress and the knowledge you are building, not just read about it on a resume.

Your Next Step

The brochure rule requires an investment adviser to deliver its Form ADV Part 2A brochure and Part 2B supplements before or at the time a client signs, with many states requiring 48 hours’ notice or a five-business-day right to cancel. Each year, material changes must be summarised for clients within 120 days, and disciplinary changes must be delivered promptly.

Remember “SEC at signing, states 48 or 5,” and you will be ready for every version of this question the exam can ask.