The grace period for firms to furnish investors with Form CRS customer relationship summaries has indeed ended now that the SEC has sanctioned firms for the first time, a little more than a year after the requirement took effect.
The SEC has fined 21 investment advisers and six broker-dealers a total of $910,092. Without admitting or denying the findings, the firms agreed to be censured, cease and desist from violating the charged provisions, and pay civil penalties ranging from $10,000 to $97,523.
“Registration with the SEC as an investment adviser or broker-dealer comes with mandated filing and disclosure obligations,” Gurbir S. Grewal, director of the SEC’s Enforcement Division, stated in a July 26 release announcing why the SEC charged 27 financial firms for Form CRS filing and delivery failures.
“Today’s cases reinforce the importance of meeting those obligations and providing retail investors with information that is intended to help them understand their relationships with their securities industry professionals.”
Form CRS Requirements Protect Retail Investors
Customer relationship summaries are meant to explain the types of services a firm offers as well as the fees and costs it charges for them and to alert investors to any potential conflicts of interest or disciplinary histories on behalf of the firm or its financial professionals. Firms must also disclose any standards of conduct that they are obligated to fulfill. The relationship summary must be written in plain English and be concise.
Firms have been required to provide customer relationship summaries to retail investors since June 30, 2020. They are also to post the summaries to their websites. Broker-dealers are to complete Form CRS while advisers use Form ADV Part 3.
Regulators shared their expectations for summaries with firms leading up to last year’s effective date and during the first 12 months that they were required. They also offered guidance on completing, filing, and distributing Form CRS.
For example, in April 2020, the SEC issued a risk alert regarding Examinations that Focus on Compliance with Form CRS. It then shared preliminary observations from their initial examinations at a Roundtable on Regulation Best Interest and Form CRS in October 2020. Then it went on to list Form CRS in the examination priorities for 2021 that it released in March.
More recently, at FINRA’s annual conference in May, executives from the industry regulator said that enforcing Form CRS would be a top item on examiners’ agendas this year. They would no longer take a “good faith approach” in which they largely assessed a firm’s implementation progress.
“Form CRS is the first stop for examiners at the beginning of an exam, both to look for compliance with Form CRS instructions and also for getting a high-altitude understanding of the firm for the exam,” said Bill St. Louis, senior vice president and firm group leader for FINRA member firms assigned to the Retail and Capital Markets firm grouping, in a panel discussion about Reg BI and Form CRS observations and expectations.
Form CRS Training Key to Compliance
If any questions as to regulators’ priorities or intents had lingered in the months since FINRA’s conference, the SEC’s first enforcement actions for Form CRS violations have since dispelled those doubts. According to the SEC’s orders, each of the firms charged missed regulatory deadlines for filing or delivering its Form CRS, or posting it to its website, until being twice reminded of the missed deadlines by their regulators — in the case of investment advisers, by the SEC’s Division of Examinations, and in the case of broker-dealers, by FINRA.
“It’s noteworthy that chief compliance officers weren’t named in these enforcement cases since they were reminded at least twice by FINRA and/or the SEC before complying,” said Margie Webber, Director of Regulatory Compliance for RegEd. “It will be interesting to see if state securities regulators will piggyback on the SEC enforcement.”
Regulators’ intent to enforce Form CRS reinforces the need for related education and training for firms, advisers, and brokers, Webber said. “Investor protection is a top regulatory priority for state and federal regulators. It should be a top priority for industry as well.”
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