Form CRS: An Overview of the SEC-Mandated Customer Relationship Summary Due June 30, 2020

About Form CRS

In June 2019, the SEC adopted requirements (SEC Release 34-86032) for registered investment advisers, broker-dealers, and dual-registrants that do business with retail investors to file Form CRS (customer relationship summary). Form CRS is intended to inform retail investors about:

  • The types of client/customer relationships and services the firm offers;
  • Fees, costs, conflicts of interest, and required standard of conduct associated with those relationships and services;
  • Whether the firm and its financial professionals currently have reportable legal or disciplinary history;
  • How to obtain additional information about the firm.

Form CRS applies to registered investment advisers, broker-dealers, and dual registrants that do business with retail investors. See page 189 of SEC Release 34-86032 for the definition specific to Form CRS and more information.

  • For investment advisers, Form CRS is known as Part 3 of Form ADV.
  • For broker-dealers, Form CRS is known as such and has no association with Form BD.
  • Form CRS does not apply to those who do business only with institutional investors.
  • Form CRS is an additional disclosure requirement. It does not eliminate any existing disclosures.
  • Form CRS may be delivered as part of a disclosure packet, but it must be the first document. For example, some investment advisers are considering a disclosure packet approach to include Form ADV Part 2B disclosure supplements.
  • Dual registrants may have particular challenges. For example, if the firm is a dual registrant, but the financial professional engaging with the retail investor is qualified only as a registered representative, it must be made clear in the relationship summary.

The deadline for firms to be compliant with Form CRS is June 30, 2020.

Form CRS is designed to help retail investors better understand the nature of the relationship and what services they can expect from a financial firm and its individual professionals, primarily in terms of a fee-based account with an investment adviser, a transaction-based account with a broker-dealer, and the significance, roles, and duties of an investment advisory representative versus those of a registered representative.

Formatting and presentation instructions are specific (See general instructions for Form CRS).

  • Firms must respond to each item and must provide responses in the same order as the items appear in the instructions.
  • The relationship summary must not exceed the equivalent of two pages, for standalone investment advisers or broker-dealers, or four pages, for dual registrants, using reasonable paper size, font size, and margins. If delivered electronically, the relationship summary must be the equivalent of the paper formatting.
  • The relationship summary should be concise and direct, using short sentences and paragraphs. It  must be written in plain English (see the SEC’s A Plain English Handbook: How to Create Clear SEC Disclosure Documents), taking into consideration retail investors’ level of financial experience. Responses to each item must be written as if speaking to the retail investor, using “you,” “us,” “our firm,” etc. Responses must be factual and provide balanced descriptions to help retail investors evaluate services.
  • White space, charts, graphs, tables, and other graphics design features should be included to make the relationship summary easy to read. For a relationship summary posted on a website or otherwise provided electronically, online tools are encouraged, including links to video or audio messages, mouse-over windows, chat functionality, and hyperlinks to information that enhances a retail investor’s understanding of the material in the relationship summary.
  • Conversation starter questions must be formatted to make them more noticeable and prominent than the standard surrounding text.

Conversation starter questions must be included in Form CRS. They are intended to engage retail investors in a discussion about the differences between an investment adviser and a broker-dealer and their relationship with a financial professional, including legal obligations, conflicts of interest, and reportable disciplinary history. For example:

  • “As a financial professional, do you have any disciplinary history? For what type of conduct?”
  • Firms must answer “yes” or “no” accordingly and, regardless of the answer, refer retail investors to, for additional information.
  • Firms with disciplinary history should be prepared to answer follow up questions and direct clients to additional information.

Other conversation starter questions pertain to conflicts of interest. (Item 3. Fees, Costs, Conflicts, and Standard of Conduct; see page 550 of SEC Release 34-86032 for more information.) For example:

  • “What are your legal obligations to me when providing recommendations as my broker-dealer or when acting as my investment adviser? How else does your firm make money and what conflicts of interest do you have?”
  • Firms will be required to distinguish firm-level from financial professional–level conflicts.

Initial Filing Requirements

Investment advisers must file Form ADV, Part 3 (Form CRS) electronically through IARD. Broker-dealers must file Form CRS electronically through CRD. Dual registrants are to file both. See page 544 of SEC Release 34-86032 for more information.

IARD and CRD systems should be available to accept filings on May 1, 2020; initial filings must be made no later than June 30, 2020.

Delivery Requirements to Clients

Initially, Form CRS must be delivered to current and prospective retail investor clients within 30 days of the regulatory filing deadline of June 30, 2020.

Investment advisers must send Form CRS to clients and prospective clients before or at the time they enter an investment advisory contract with the retail investor. This includes oral agreements. Broker-dealers must send Form CRS to clients and prospective clients before a recommendation of account type, securities transaction, or a recommendation of investment strategy involving securities is made or before placing an order for a retail investor, whichever is earliest. Dual registrants must send Form CRS in accordance with the earliest triggering event of an investment adviser or a broker-dealer.

Form CRS must be amended or revised and filed with IARD or CRD within 30 days of any information becoming materially inaccurate. Amended or revised versions of Form CRS must be delivered within 60 days of change to each retail investor who is a client or considered a prospect of the firm.

Compliance and Recordkeeping

The SEC may use the information provided in Form CRS to manage its regulatory and examination programs, and firms will need to integrate the relationship summary into their compliance controls, including policies and procedures, supervisory controls, testing, tracking, training, and recordkeeping.

  • Investment advisers must retain copies of each relationship summary and each amendment or revision, and they must retain a record of the dates that each relationship summary and any amendments or revisions were given to any client or prospective client who subsequently becomes a client. Records must be retained for a minimum of five years. (Amends Rule 204-2 of the Investment Advisers Act of 1940.)
  • Broker-dealers must retain a record of the date each relationship summary was provided to each retail investor, including any summary provided before the retail investor opens an account. Records must be maintained for a minimum of six years after the relationship summary is created. (Amends Rule 17a-3 of the Securities Exchange Act of 1934.)
  • Dual registrants must retain records in accordance with which role they adopt as a financial professional.
  • See page 499 of SEC Release 34-86032 for more information.

RegEd is ready to assist investment advisory firms, broker-dealers, and dual registered firms with various compliance issues related to Form CRS, including managing various disclosures, training, versioning, managing client delivery, and more. For further information, schedule a consultation with RegEd representative.

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