SEC headquarters SEC headquarters in Washington. (Photo: Diego M. Radzinschi/ALM)

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.

Retail Investors

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.

Content

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.

The SEC integrated the discussion of fees, costs, conflicts of interest and standard of conduct into one item on the form. However, this information will appear as separate, consecutive sections so that each topic is distinct for investors. To distinguish firm-level from investment professional-level conflicts, firms are required to disclose how their investment professionals are compensated and the conflicts of interest those payments create.

Disciplinary History

Firms must indicate under a separate heading whether they, or any of their investment professionals, have reportable disciplinary history. Firms also must explain where an investor can conduct further research on these events.

Additional Information

An additional information section at the end of the Form will explain where the retail investor can find more information about the firm. The additional information will also include how to report complaints.

Filing, Delivery, Updating

Form CRS must be filed with the SEC and delivered to retail investors. Firms that are registered with the SEC prior to June 30, 2020, must file Form CRS with the SEC beginning May 1, 2020, and before June 30, 2020. On and after June 30, 2020, investment advisers and broker-dealers with a pending SEC registration must file their Form CRS with their registration.

The relationship summary will be accessible through the SEC’s public website, as well as the firm’s website.

Investment advisers must initially deliver the form to their new and prospective investors before (or at the time) the investment adviser and client enter into an agreement. Broker-dealers must deliver Form CRS to new and prospective investors before or at the earliest of: a recommendation of an account type, a securities transaction, or an investment strategy involving securities; placing an order for the retail investor; or the opening of a brokerage account for the retail investor.

Dually registered firms must deliver the form at the earlier of these delivery events.

For existing clients, investment advisers and broker-dealers are required to provide Form CRS within 30 days after the required filing date with the SEC. The firm must deliver the most recent version of the form to an existing retail investor if the adviser: opens a new account that is different from the client’s existing account, recommends that the client roll over assets from a retirement account into a new or existing account or investment, or recommends or provides a new brokerage or investment advisory service or investment that does not necessarily involve the opening of a new account and would not be held in an existing account.

Investment advisers and broker-dealers may use electronic delivery of Form CRS but must provide a free paper copy of the form upon request.

Form CRS must be updated within 30 days whenever the form becomes materially inaccurate. Firms are also still required to provide a current Form to retail investors within 30 days upon request. Firms are allowed to communicate Form updates to existing clients within 60 days.

In addition, updates to the form must be highlighted for clients.

In some cases, firms can use their own wording or methods to satisfy the disclosure requirements. In other cases, however, they will be required to provide information in a specific manner using prescribed language, questions and/or headings. To ensure compliance with the requirements, investment advisers and broker-dealers should thoroughly review the final rule in conjunction with the Form ADV Instructions and Form CRS Instructions.


Beth Miller is an attorney with Spencer Fane LLP in the firm’s Overland Park, Kansas, office. Her practice focuses on helping clients by identifying practical solutions to a wide variety of legal matters in the areas of employer-sponsored retirement plans, executive compensation, fiduciary obligations and advisory services. She can be reached at bmiller@spencerfane.com.