The SEC has released additional guidance detailing how firms need to disclose disciplinary history of both firms and their financial professionals on their Form CRS. The guidance comes several weeks after it was found numerous firms failed to accurately disclose they had past disciplinary issues to clients.
In a statement released with the guidance, Chairman Jay Clayton; Dalia Blass, the director of the Division of Investment Management; and Brett Redfearn, director of the commission’s Division of Trading and Markets, stressed that firms do not have the discretion to leave an answer about disciplinary history blank, and stressed that they could not add supplemental descriptions, either.
“When responding to the disciplinary history heading in their relationship summaries, firms may not add descriptive or other qualitative or quantitative language,” the statement read. “Adding such language might, intentionally or unintentionally, obfuscate or otherwise minimize the disciplinary history.”
The Form CRS intends to supply consumers with a concise and accessible document that details the relationship between client and advisor, including whether the firm had reported disciplinary issues on previous Form ADVs. Earlier this month, The Wall Street Journal reported that as many as 20% of firms who reported on their forms they had no previous disciplinary incidents actually did. According to SEC instructions on Form CRS creation, firms base their disciplinary disclosures in the form on whether they’d previously disclosed disciplinary information on their Form ADV, Form BD, Form U4 or U5.
The new guidance comes in the form of FAQs, which stress that even if a firm is not currently disclosing or required to disclose any disciplinary history of itself or any of its financial professionals, it is still not allowed to omit the section on disciplinary history.
“The Commission made clear in the Form CRS adopting release that the legal and disciplinary history of a firm and its financial professionals is important information for retail investors to have when entering into a financial relationship,” the guidance read. “The absence or presence of legal or disciplinary history (as described by the Instructions) is applicable to all firms. It would therefore not be permissible for a firm to omit the heading. Similarly, it would not be permissible for a firm to omit a ‘yes’ or ‘no’ response.”
Firms also cannot amend the disciplinary heading to pertain only to their firm’s history in order to avoid disclosing that an individual financial professional in the firm has disclosable disciplinary issues, but the SEC would allow firms to separate the two to show that while the firm itself has no disciplinary history, a financial professional at the firm does. However, the guidance unequivocally stated that firms cannot add additional language to their answers about disciplinary history. The section can only include a “yes” or “no” answer, a reference for clients to use Investor.gov/CRS, and a “conversation starter” for clients (although, some advisors have found that the conversation starters were not leading to more questions and inquiries from clients).
The new guidance does offer some clarity on what firms can and cannot do, according to Bryan Gort, an attorney and member of the firm Parker MacIntyre. He said it underscores the fact that the SEC wants the forms to spur conversations between clients and advisors, and not necessarily provide all the information that an investor needs.
“I think it at least filled in some of the gaps, because when we were drafting these for some clients, it wasn’t clear exactly what leeway you had,” he said. “Some clients, when they see a disciplinary history section, they want to get out in front of it and say all they can say.”
Required separate forms that demand identical disclosures could potentially have led to some of the disciplinary reporting discrepancies, Brian Hamburger, the president and CEO of MarketCounsel, previously told WealthManagement.com. Hamburger said the Form CRS demanded much of the same information as that on a firm’s Form ADV, and duplicating that information could be problematic if firms don’t have a “good handle” on their inventory of conflicts and disclosures, whether due to human bias, clerical error or other issues.
“We’re creating a recipe for disaster when we leave it to firms to re-disclose what’s already disclosed,” he said.
Additionally, the SEC and FINRA will also co-host a roundtable discussing their initial observations during the first few months of Regulation Best Interest and Form CRS implementation. The event will be held virtually, at 1 p.m. on October 26.
