In June 2019, the U.S. Securities and Exchange Commission adopted Form CRS, its document for client or customer relationship summaries. The agency required SEC-registered investment advisors and SEC-registered broker/dealers to deliver their Form CRS to new and prospective retail investors by June 30, 2020, with deliveries to existing retail investors starting by July 30, 2020. Firms also had to post their Form CRS prominently on their website if they had one.
Regulators have been stepping up their Form CRS reviews and reports from the SEC and FINRA have been critical of some firms’ compliance efforts. In July 2021, for instance, the SEC announced that 21 investment advisors and six broker/dealers had agreed to settle charges that they failed to “timely file and deliver” their Form CRS to their retail investors. Another 12 firms reached Form CRS-related settlements this past February.
Kelli Haugh, managing director of investment advisor consulting at Foreside, notes the SEC explained its enforcement approach to Form CRS in the agency’s December 17, 2021, publication, “Staff Statement Regarding Form CRS Disclosures.” The Form CRS instructions require specific responses and prescribed language without modification, says Haugh. Some firms were observed to have omitted required information or only partially responded to the questions in the Form CRS instructions. “Firms also elaborated on disclosures with marketing hype or explanations of how conflicts of interest are mitigated,” she adds. “The SEC noted that including impermissible or extraneous language can make it harder for investors to focus on key information. Additionally, some affiliated firms preparing a single Form CRS did not clearly delineate the services offered by each firm or clearly attribute disclosures to the relevant firm.”
FINRA also has been critical of Form CRS compliance. In February 2022, the agency released its “2022 Report on FINRA’s Examination and Risk Monitoring Program.” FINRA’s report cited multiple deficiencies on completed forms, including:
- Deficient Form CRS filings—Firms’ Form CRS filings significantly departed from the SEC’s Form CRS instructions and FAQ guidance
- Form CRS not posted properly on website
- Inadequate Form CRS amendments
- Misconstruing obligation to file Form CRS
Eric Young, senior managing director at Guidepost Solutions, says both the SEC and FINRA cite at least three types of Form CRS issues or violations: 1) failure to file accurate and compliant Form CRS with the SEC or FINRA or to prospective or existing retail clients; 2) failure to fully disclose conflicts of interest between the firm’s affiliates and/or conflicts with their clients; and 3) providing language too technical in Form CRS for clients to easily understand.
“Even as a seasoned compliance officer, I found a sampling of Form CRS from major wealth management firms’ public websites to be confusing, too technical, and far from simple to understand,” says Young. “One major household firm’s website did not even have a Form CRS, or at least one easily searched or found. Furthermore, improper Form CRS disclosures might be symptomatic of deeper compliance, cultural, internal control, and reporting issues, which reflects a failure to meet the best interests of clients."
Implementing Best Practices
It’s often tempting to blame the regulators for excessively obscure compliance guidance, but it’s hard to make that case for Form CRS. Christopher Grobbel, an associate with Goodwin Law, points out that the SEC took a gradual approach to enforcing the form’s requirements. Most of the initial enforcement related to Form CRS was simple good faith compliance because it was a new rule, Grobbel explains. That approach evolved, however. “We have begun to see the SEC move away from looking only for good faith compliance and to start looking more substantively at firm's disclosures on Form CRS rather than simply did they file by the deadline,” he said.
In addition to taking a graduated enforcement approach, the SEC has provided reams of guidance, including detailed instructions, a list of FAQs and updated guidance. In other words, the compliance roadmap is in place. “A lot of our approach is based on SEC guidance,” says Lauren Schwartz, an associate with Goodwin Law. “And so, we take a step back and we assess what we've seen and the recurrent themes that the regulator has taken focus on. Then we almost create a punch list for ourselves when we take a review or when we even just reference Form CRS.”
Grobbel and Schwartz were among the co-authors of a discussion and summary chart of the SEC’s updated guidance. If you haven’t reviewed your Form CRS recently, these documents are a good starting place to spot possible compliance problems.
“We believe broker-dealers, especially with new SEC leadership, should review their Reg BI processes now plus analyze their Form CRS distribution to ensure compliance,” says Timothy Slavin, senior vice president of retirement with Broadridge. “These communications must include the required data points the SEC mandates, but it also might be a great time to review the Form CRS for simplicity, clear communications, and data integrity. Reg BI and Form CRS are here to stay so it requires firms to be ever diligent in ensuring the requirements are met.”
