Firms’ Customer Relationship Summary forms for retail investors are too cluttered with legal jargon and overtly technical terminology, according to the SEC’s Standards of Conduct Implementation Committee.
In the statement released late last week, committee members urged advisors and firms to be concise when writing the required forms by “using plain English” and to consider how much (or little) financial experience retail investors might have.
“For example, some firms referenced terms such as 'riskless principal,' 'in arrears,' 'markups' and 'markdowns' or cited specific SEC rules without providing clear explanations,” the statement read. “The staff also observed some relationship summaries that included disclaimers and hedging language (often placed in footnotes using small text and, in some cases, legal jargon) that are neither required nor permitted.”
The committee’s statement comes after the Plain Language Group, which advocates for more accessible language in financial services compliance documents, released its own analysis earlier this month, assessing how several firms fared in writing a Form CRS that was accessible for readers. According to Deborah Bosley, the founder of the Plain Language Group, the study ran six firms’ relationship summaries through AI software created to gauge the readability of documents, and also examined the forms for standard plain language best practices.
The results were sobering; of the examined forms, only one (from Ameriprise) performed moderately well, with others, including from Commonwealth, SagePoint Financial and Wells Fargo, falling short on accessibility. According to the report, forms often included too much information on a single page, with too many long sentences and authors using the passive voice, tiny typeface and minimal visual appeal. Like the SEC, the group found that forms were “loaded” with financial jargon without accompanying explanations for readers.
“Once you load a document with words and phrases that someone doesn’t understand, they will often stop reading as soon as they encounter it, (like) another language, almost literally. They’re looking upon a language they don’t understand,” Bosley said. “Frankly, I think the regulation was asking for too much information and I think that financial institutions took this as an opportunity to say everything rather than just what investors needed to know.”
Bosley had concerns about readability in Form CRS documents before the disclosure requirement was implemented in June 2020 with Regulation Best Interest (she’s also critiqued the SEC for using its own inscrutable language in its Reg BI rule). Bosley worried firms would find it difficult to write plain language disclosures in the space allotted, and that writing forms like these are too often assigned to attorneys and compliance officers trained to use complex language and industry jargon to impart an impression of expertise.
Bosley said the deficiencies on the Form CRS documents the group studied were likely common among many other firms, but cautioned that extending the length of the summaries from its mandated two pages would not necessarily solve the problem. She doubted many clients would read disclosure documents that stretched to six or seven pages.
“To try to get the most important information on a couple of pages I think is a good benchmark, for just about as much as you can expect people to read,” she said. “That can become an excuse; ‘you’re asking so much and only giving us two pages.’ But there is a lot of information loaded up in those paragraphs that doesn’t necessarily have to be there.”
The SEC’s statement from last week raised a bevy of additional concerns beyond just jargon. The committee found some firms omitted required disclosures, including headings, prescribed language or mandated conversation starters concerning conflicts and disciplinary history. In some instances, firms followed the mandates of the commission’s proposed instructions on Form CRS, rather than the finalized requirements.
The SEC also claimed that some firms needed to include more specific references to more detailed information on services, fees, costs and conflicts, and that their descriptions of some of these attributes fell short.
“While the staff frequently observed disclosures that provided succinct descriptions of relationships and services designed to facilitate retail investor access to more detailed layers of disclosure, some relationship summaries reviewed did not include required information or included impermissible, extraneous or unresponsive disclosures,” the statement read.
The SEC reiterated that it gave its initial observations about firms’ Form CRS during a roundtable last year, and urged firms to review the form’s adopting release and a set of FAQs about the mandated disclosure. Earlier this year, the SEC charged dozens of firms with failing to timely deliver their Form CRS to both the commission and clients, but according to Bosley, the SEC may need to more forcefully pursue firms failing to present their CRS in a readable format.
“Unless the SEC has consequences for not using plain language, there is no incentive for these firms to revise them,” she said. “There’s rarely consequences for violating the part of the regulation demanding plain language. Therefore, with no consequences, they’ve nullified one of the criteria for meeting the regulatory requirement."
