On June 5, the Securities and Exchange Commission adopted a rulemaking package that is applicable to investment advisers and broker-dealers. The package includes two final rules and two interpretations — Regulation Best Interest, the Investment Adviser Standard of Conduct Interpretation, Form CRS – Relationship Summary, and the Solely Incidental Broker-Dealer Exclusion Interpretation. This is the third in a series of articles describing the SEC’s rulemaking package.
The Form CRS disclosure requirement applies to both broker-dealers and investment advisers who are registered with the SEC. Form CRS is described as a “brief relationship summary” that investment advisers and broker-dealers must provide to their retail investors. The form is designed to provide information regarding the types of client and customer relationships and services the firm offers; the fees, costs, conflicts of interest, and required standard of conduct; whether the firm and its investment professionals currently have reportable legal or disciplinary history; and how to obtain additional information. The SEC created Form CRS to enable investors to make better decisions about their relationship with a firm or an investment professional.
For purposes of Form CRS, a “retail investor” is defined as “a natural person, or the legal representative of such natural person, who seeks to receive or receives services primarily for personal, family or household purposes.” The Form must be provided regardless of whether there is a recommendation, and covers prospective and existing clients of investment advisers and broker-dealers.
The SEC clarified that Form CRS applies to retail investors who seek services for their retirement and non-retirement accounts. However, employer-sponsored retirement plan participants “should not be viewed as ‘seeking or receiving services’ for the purposes of the Form CRS definition of retail investor when they are merely electing among plan features offered by firms and financial professionals retained and supervised by a plan representative.” The definition of retail investor also does not include most employer-sponsored retirement plans or their plan representatives, because “such plans and their representatives are not seeking services primarily for personal, family or household purposes.”
Presentation and Format
The form must be prepared in a question-and-answer format with standardized questions serving as the headings in a prescribed order. Suggested follow-up questions for retail investors to ask their investment professionals also must be included. Investment advisers and broker-dealers that provide only automated or online services must answer the questions on their website and provide within the form a means of accessing the questions and answers.
The form may not exceed two pages for investment advisers or broker-dealers. For dually registered firms, the form may not exceed four pages, if the relationship summary includes the firm’s brokerage and advisory services. Similarly, affiliates offering brokerage or advisory services to retail investors may also provide a single relationship summary.
The SEC encourages the use of charts, graphs and other graphics or text features to explain or compare different aspects of a firm’s offerings. The guidance explains that additional narrative language may be required when graphics or text features are used, if the feature is not self-explanatory and responsive to the disclosure topic.
In addition, the SEC supports the use of online tools that populate comparative disclosure information based on investor selections when the form is provided electronically. The instructions to Form CRS include information about the use of electronic and graphical formats to assist firms in the use of electronic media, communications and tools in the Form.
Form CRS is “principally designed to provide succinct information about relationships and services the firm offers to retail investors, fees, and costs that retail investors will pay, conflicts of interest, and the applicable standard of conduct, and disciplinary history.”
For example, the form is required to include a standardized introductory paragraph, as well as a link to the SEC’s investor education website page that provides educational materials about broker-dealers and investment advisers. The introduction must also explain that brokerage and advisory services and fees differ and that it is important for investors to understand the differences.
Relationships and Services
Firms must state whether they offer brokerage services, investment advisory services or both. In addition, they must summarize the principal services, accounts or investments made available, and any material limitations on those services. All firms are required to address the following topics in the description of their services: monitoring, investment authority, limited investment offerings, and account minimums and other requirements.
Firms must include three suggested questions for retail investors to ask their investment professional. The content of the specific questions depends on whether the firm is a dually registered investment adviser and broker-dealer. All firms are also required to include three additional questions to help investors understand a financial professional’s investment methodology, experience and qualifications.