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FINRA Contemplates Requiring a Broker Version of Form ADV Disclosure

Client Alert

Authors: Ivan B. Knauer and Matthew R. Silver

10/29/2010
On October 27, 2010, the Financial Industry Regulatory Authority (FINRA) released a regulatory notice (Notice 10-54) setting forth a concept proposal to require member firms (i.e., U.S. registered broker-dealers), at or before commencing a business relationship with a “retail customer,” to provide a written customer disclosure statement similar in purpose to Part II of Form ADV.

Form ADV is a disclosure brochure that is required to be delivered to clients of registered investment advisers. Under the FINRA proposal and the definition of “retail customer,” the disclosure would be provided to virtually all brokerage clients other than (a) banks, savings and loan institutions and insurance companies, (b) registered investment companies, (c) registered investment advisers, and (d) other customers with total assets of $50 million or greater.

The proposal “aims to require broker-dealers to provide retail customers with an upfront disclosure document that sets forth in plain English a firm’s accounts and services, its associated conflicts of interest and any limitations on duties owed to the customer.” It comes just a few months after the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).

As FINRA has stated, “[w]ith the enactment of Dodd-Frank, the staff believes the concept is even more appropriate, if not an outright necessity.” Dodd-Frank requires the U.S. Securities and Exchange Commission (SEC) to complete a study on ways to improve investors’ access to information on investment advisers and broker-dealers (including disciplinary actions, regulatory, judicial, and arbitration proceedings, and other information). Dodd-Frank further requires the SEC to consider in its study ways to coordinate the regulation of broker-dealers, on the one hand, and investment advisers, on the other. (We note in passing that FINRA’s proposal also could be useful in the event that FINRA were given regulatory oversight over investment advisers.)

Notice 10-54 provides basic details on the types of disclosure that would be required.
Some of the areas of proposed coverage include:

  • the scope of services and products provided by the broker to its retail customers
  • service limitations (i.e., research available through the broker may be limited or influenced by the issuers with which the broker maintains an investment banking relationship, acts as a market maker or otherwise engages in proprietary trading)
  • disclosures as to incentives that a firm or its registered representatives have to recommend certain products or services
  • disclosures of conflicts of interest that may arise; and
  • limitations on the duties a firm owes to its customers (i.e., that it has no duty to assure the ongoing suitability of an investment or portfolio of investments).
FINRA is actively seeking comment on whether delivery of such a brochure should be in hard-copy, electronic form or both, and whether an allowance for “two tiered” disclosures might be appropriate (such as a general disclosure with hyperlinks or Web site references where investors can obtain more detailed disclosures of a firm’s products, services and attendant conflicts and limitations).

Given the conceptual nature of the FINRA proposal, our view is that regulated entities have a strong opportunity to influence the ultimate contours of the rule through the comment process. The comment period for interested parties runs until December 27, 2010.


Ivan B. Knauer
Matthew R. Silver
Lisa D. Zeises

The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.