In June 2019, the US Securities and Exchange Commission adopted Form CRS, which is its document for the Client or Client Relationship Summary. The agency required SEC-registered investment advisors and SEC-registered broker dealers to deliver their Form CRS to new and potential retail investors by June 30, 2020, with delivery to existing retail investors by June 30, 2020. Firms also had to post their own. If they have CRS then do the form prominently on their website.
Regulators are advancing their Form CRS review and reports from the SEC and FINRA are criticizing the compliance efforts of some firms. For example, in July 2021, the SEC announced that 21 investment advisors and six broker-dealers have agreed to settle allegations that they failed to “timely file and deliver” their Form CRS to their retail investors. are. Another 12 firms reached settlements related to Form CRS last February.
Kelly Hough, managing director of Investment Advisory Consulting at Fourside, notes that the SEC explained its enforcement approach for Form CRS in the agency’s December 17, 2021, publication, “Staff Statement Concerning Form CRS Disclosure.” The Form CRS instructions require specific responses and prescribed language without modification, Hoff says. Some firms have omitted the required information in the Form CRS instructions or only partially answered the questions. “Firms also elaborated on the disclosure with an explanation of how to reduce marketing hype or conflicts of interest,” she adds. “The SEC noted that including unacceptable or extraneous language can make it difficult for investors to focus on important information. Additionally, some affiliated firms that prepare a single Form CRS clearly delineated the services offered by each firm. has not made or has not explicitly given the credit of disclosure to the firm concerned.
FINRA Form has also been critical of CRS compliance. In February 2022, the agency released “its 2022 report on FINRA’s Examination and Risk Monitoring Program”. The FINRA report has cited several deficiencies in the filled out forms, including:
- Poor Form CRS Filing—Firms’ Form CRS filing differs significantly from the SEC’s Form CRS instructions and FAQ guidance
- Form not posted properly on CRS website
- Inadequate Form CRS Amendment
- Wrong Creation Obligation for Filing Form CRS
Eric Young, senior managing director at Guidepost Solutions, says that both the SEC and FINRA cite at least three types of Form CRS issues or violations: 1) accurate and compliant Form CRS with the SEC or FINRA or potential or existing retail customers failure to file; 2) failure to fully disclose conflicts of interest between the firm’s affiliates and/or conflicts with their clients; and 3) Providing very technical language in Form CRS for customers to understand easily.
“Even as a seasoned compliance officer, I found sampling Form CRS from the public websites of major wealth management firms confusing, very technical and easy to understand,” says Young. “The website of a major domestic firm did not even have Form CRS, or at least one that was easily searched or found. In addition, improper Form CRS disclosure can be symptomatic of deeper compliance, cultural, internal control and reporting issues, reflecting a failure to meet the best interests of customers.”
implementing best practices
It is often tempting to blame regulators for overly vague compliance guidance, but it is difficult for Form CRS to make that case. Christopher Grobel, an associate at Goodwin Law, explains that the SEC took a gradual approach to applying the requirements of the form. Most of the initial enforcement relating to Form CRS was simple good faith compliance because it was a new rule, explains Grobel. However, that approach evolved. He said, “We have begun to move the SEC away from simply seeking compliance in good faith and begin to look more concretely at the firm’s disclosures on Form CRS, rather than just the deadline they filed. “
In addition to taking a graduate enforcement approach, the SEC provides guidance, including detailed instructions, a list of frequently asked questions, and updated guidance. In other words, the compliance roadmap exists. “A lot of our approach is based on SEC guidance,” says Lauren Schwartz, an associate at Goodwin Law. “And so, we take a step back and we assess what we’ve seen and those recurring themes that the regulator has focused on. Then when we review or when we just refer to Form CRS. We almost make a punch list for ourselves.”
Grobel and Schwartz were among the co-authors of the chart discussing and summarizing the SEC’s updated guidance. If you haven’t reviewed your Form CRS recently, this document is a good start for locating potential compliance issues.
Timothy Slavin, Senior Vice President for Retirement with Broadridge, says, “We believe that broker-dealers, especially with the new SEC leadership, should now review their Reg BI processes and review their Reg BI processes to ensure compliance. The form should analyze the CRS distribution.” “These communications should include the data points required by the SEC mandate, but this may also be a good time to review Form CRS for simplicity, clear communication and data integrity. Reg BI and Form CRS are here to stay Therefore, firms need to be always diligent in order to meet the requirements.
