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SEC Clarifies Form CRS Rules on Reporting Disciplinary History

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The Securities and Exchange Commission has released updated frequently asked questions guidance on the customer relationship summary, or Form CRS, that zeroes in on disclosing a firm’s disciplinary history.

Related: Firms Failing to Report Advisors’ Disciplinary Histories on Form CRS: WSJ

The Wall Street Journal found in late summer that at least 1,300 brokerage and financial advisory firms incorrectly stated on the form that neither they nor their financial professionals had legal or disciplinary histories.

In a joint statement, SEC Chairman Jay Clayton along with Dalia Blass, head of the Investment Management Division, and Brett Redfearn, director of the Trading and Markets Division, state that after reviewing Form CRS filings by the agency’s Standards of Conduct Implementation Committee, they observed examples of relationship summaries where firms did not provide a response in the disciplinary history section.

“Importantly, a firm must report disciplinary history in its relationship summary if that history already must be reported on other forms,” the three said in their statement.

“Firms do not have discretion to leave the answer blank or to omit reportable disciplinary history from the relationship summary. Firms should review their reportable disciplinary history and that of their financial professionals to ensure that their relationship summaries are accurate, complete and consistent with those other forms,” the statement continues.

“When responding to the disciplinary history heading in their relationship summaries, firms may not add descriptive or other qualitative or quantitative language. Adding such language might, intentionally or unintentionally, obfuscate or otherwise minimize the disciplinary history.  However, as we describe …, firms or their financial professionals may provide the relevant disciplinary history directly to retail investors.”

Sara Crovitz, a partner with Stradley Ronon in Washington, told ThinkAdvisor by email Monday that the tone of all four of the updated FAQs indicate that the SEC “clearly is unwilling to allow advisors that have no disciplinary history to shorten or eliminate that section of the CRS.”

Added Crovitz: “I understand that the SEC wants standardized disclosure, but if a firm and its associated persons have no disciplinary history, I also can understand why the firm might see including the full information as a waste of valuable space in the Form CRS. This really goes to how hard it is to fit information that is useful to retail investors into what the SEC has limited to two pages (or four for dual registrant), which is particularly difficult in a paper version.”

Related: Human Capital: SEI’s Anderson Sizes Up Likely Changes to SEC’s Form CRS

The FAQs state that a firm’s relationship summary “may not omit the disciplinary history section in its entirety or omit the disciplinary history with respect to either a firm or its financial professionals, even when there is no such reportable disciplinary history,” Crovitz said.

“The FAQs explain that the required heading, which applies to both a firm (including relevant affiliates) and a firm’s financial professionals, requires a ‘yes’ or ‘no’ response.”


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