Form CRS Enforcement Begins with $910,092 in Fines

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.”

As built-for-purpose tools tailored to the needs of broker-dealers and investment advisers, RegEd’s compliance solutions for securities firms are effective and cost-efficient. Firms seamlessly manage all aspects of their compliance programs, reducing risks and costs by automating and streamlining processes. And each solution is configured for optimal performance by RegEd’s implementation experts, who have worked with many of the nation’s largest securities firms.

RegEd’s compliance management platform includes the following solutions (among others).

  • Education and Training Solution Suite – Advanced learning management technology streamlines the creation of a firm’s annual compliance program, simplifies course enrollment, provides access to timely course materials, and efficiently tracks course completion.
  • Policies and Procedures Management Solution – An enterprise workflow, work-process, and task management solution enables comprehensive, end-to-end administration and oversight of all elements of a firm’s policies and procedures.
  • Conflicts of Interest Solution Suite – Automated end-to-end management of request processes, compliance monitoring, and exception management associated with conflict of interest policies embeds best practices in a firm’s compliance program. 

Schedule a consultation to learn more about how RegEd’s compliance solutions enable securities firms to improve efficiency, effectiveness, and transparency across the enterprise.

For additional ways to strengthen your firm’s compliance program, view our recent webinar on FINRA, SEC, and State Securities Enforcement Trends.

About RegEd

RegEd is the market-leading provider of RegTech enterprise solutions with relationships with more than 200 enterprise clients, including 80% of the top 25 financial services firms.

Established in 2000 by former regulators, the company is recognized for continuous regulatory technology innovation with solutions hallmarked by workflow-directed processes, data integration, regulatory intelligence, automated validations, business process automation, and compliance dashboards. The aggregate drives the highest levels of operational efficiency and enables our clients to cost-effectively comply with regulations and continuously mitigate risk.

Trusted by the nation’s top financial services firms, RegEd’s proven, holistic approach to RegTech meets firms where they are on the compliance and risk management continuum, scaling as their needs evolve and amplifying the value proposition delivered to clients. For more information, please schedule a consultation.

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