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An investment adviser is required to provide all prospective clients with a brochure or with Form ADV Part 2 at least 48 hours prior to the signing of the contract or at least at the time of the signing of the contract if the client is given a five-day grace period to withdraw without penalty. The brochure or Form ADV Part 2 will state:
• How and when fees are charged.
• The types of securities the adviser does business in.
• How recommendations are made.
• The type of clients the adviser has.
• The qualifications of officers and directors.
A balance sheet must be given to clients if the adviser has custody of client funds or requires prepayment of advisory fees of more than $500 more than six months in advance.
THE ROLE OF THE INVESTMENT ADVISER
An investment adviser charges a fee for his or her services for advising clients as to the value of securities or for making recommendations as to which securities should be purchased or sold. Unlike a broker dealer, the investment adviser has a contractual relationship with his or her clients and must always adhere to the highest standards of professional conduct.
ADDITIONAL COMPENSATION FOR AN INVESTMENT ADVISER
In addition to the fees charged by an investment adviser, an investment adviser may also:
• Receive commissions for executing a customer's transaction through certain broker dealers.
• Act as a principal in a customer's transaction.
The above sources of additional revenue must be disclosed to the client in writing prior to the investment adviser executing such transactions.
AGENCY CROSS TRANSACTIONS
An agency cross transaction is one in which the investment adviser represents both the purchasing and selling security holder either as an investment adviser or as a broker dealer. If the investment adviser is going to execute an agency cross transaction, the adviser must get the client's authorization in writing. The authorization may be pulled at any time verbally, and the adviser may not have solicited both sides of the trade. The investment adviser still maintains a duty to obtain the best execution for both clients and may not execute the cross at a price that favors one client over the other. The adviser must send notice to its clients annually detailing the number of all agency cross transactions completed by the adviser.