Since 1979, the Securities and Exchange Commission (SEC) has required all registered investment advisors to provide their clients (or prospective clients) with a written disclosure statement. The client disclosure statement is commonly referred to as the “brochure.” The brochure is intended to provide customers with essential information that would help them make an informed decision whether to retain or hire an advisor. One critical category of information that an advisor must disclose is “Disciplinary Information.” As part of their disclosure obligation, the advisor’s brochure must include essential facts about any legal or disciplinary events that are material to a customer’s evaluation of the advisor’s integrity. Logically, a customer would consider any customer arbitration claims or lawsuits against an advisor to be material. However, in response to objections from the securities industry, the SEC has determined that advisors do not have to disclose customer lawsuits in their client brochures. For obvious reasons, the securities industry feared that telling customers that their advisor is the subject of one or more customer lawsuits or complaints would be bad for business.
A False Sense of Security
Consequently, there are many customers who have no idea whether their advisor has a checkered past or is currently being sued by one or more customers. In my securities law firm, I have come across numerous instances where advisors with multiple customer lawsuits or complaints have been providing their customers with brochures that deceptively state: “There are no applicable disciplinary events that are required to be disclosed.” Such statements are, in my opinion, entirely misleading because the typical customer will simply conclude that the advisor has never been involved in any customer arbitration claims or lawsuits. To be fair, some firms do include a notice in their brochure that additional information can be found on the BrokerCheck website operated by the Financial Industry Regulatory Authority (FINRA) or on the SEC’s Investment Advisor Public Disclosure online resource. [Links to these sites are provided below.]. However, including an innocuous reference to the FINRA and SEC databases does not adequately protect the investing public from an advisory firm’s affirmative statement in the brochure that there is nothing to report.
The Bottom Line
You cannot rely on the lack of any disciplinary information included in the brochure. You also cannot rely on any written assurances in the advisory firm’s brochure that declare: “There are no disciplinary events that are required to be disclosed.” As the saying goes: Trust but verify. That being said, it is a good practice to periodically check your advisor’s status on FINRA’s BrokerCheck website or the SEC’s Investment Advisor Public Disclosure resource.
- FINRA BrokerCheck
- SEC Investment Advisor Public Disclosure
- For more information, read our blog post: Is BrokerCheck broken?