A recent Wall Street Journal analysis took a fine-tooth comb to the Securities and Exchange Commission’s customer relationship summary, Form CRS, and found that quite a few advisory firms are failing to disclose disciplinary history.
The analysis, Financial Firms Fail to Own Up to Advisers’ Past Misdeeds, found that at least 1,300 brokerage and financial advisory firms incorrectly stated on the new document that neither they nor their financial professionals had legal or disciplinary histories, the Journal’s analysis showed.
“That is about 20% of the roughly 6,200 firms in the analysis that reported they had no past blemishes,” the article states.
The firms include “a firm that state regulators found had misrepresented and improperly disclosed fees, as well as firms where employees were fined by regulators for allegedly committing forgery, impersonating customers or selling unsuitable investments,” according to the Journal.
Only about 1,800 firms — nearly one-quarter of the roughly 8,100 reviewed — disclosed past problems, the article says.
The article points to a July 27 initial review performed by the SEC, which identified cases where the forms lack some disclosures. The Journal quotes an SEC spokeswoman saying that SEC staff “have ‘observed areas where disclosure may be inaccurate or incomplete’ and that the agency’s examiners will formally review the filings to ensure they are accurate and not misleading.”
All told, the Journal said it identified “about 2,300 individual employees with disclosures that their firms failed to reflect on the new form. About 70% of those had customer complaints. Roughly 300 had disclosures of regulatory actions against them. A similar number had criminal histories, and about as many had left previous employers amid claims of misconduct.”
Advisors and broker-dealers are required to file Form CRS — being dubbed Form ADV Part 3 — which is limited to four pages.
James Lundy, a former attorney at the SEC who’s now a partner at Faegre Drinker, based in Chicago, told ThinkAdvisor that the Journal’s analysis failed to address the fact that not all disciplinary actions must be disclosed.
That said, “firms not disclosing disciplinary history that is already disclosed in the firm’s ADV can be viewed as a lack of controls and a lack of diligence,” Lundy said.
The Journal analysis appears to reveal “the numbers are so high due to the lack of disclosure being driven by the disciplinary history at the individual representative level,” Lundy continued. “That is also disappointing, but that would need to entail much more work and would be subject to a greater likelihood of errors or oversights in the process. If there are firms who overtly tried to cover this up, then they will likely be faced with referrals to the [SEC] Division of Enforcement.”
Also, Lundy added he’s “not surprised” that the paper “revealed information indicating that investors are not reading these new [Form CRS] disclosure documents.”
The SEC plans to hold a roundtable this fall to discuss potential changes to Form CRS.
During her nomination hearing in early August, SEC Commissioner Caroline Crenshaw, a Democrat, pointed to two aspects of Regulation Best Interest compliance that she views as especially critical: ensuring firms are held “accountable when they are not appropriately mitigating conflicts of interest,” and that Form CRS actually provides “valuable” information.
Lundy expects the SEC to share information at the roundtable regarding the agency’s initial exams of Form CRS, which took place just after the June 30 compliance date.
The SEC’s Office of Compliance Inspections and Examinations said its initial exams would focus on assessing whether firms have made a good-faith effort to implement Form CRS.
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