03 January 2020
Main Contributor: Elizabeth Cope, CPA, CSCP, CIPM, CEO & Lead Consultant
Have you heard?
There is a new form in town.
It goes by many names…it is referred to as the Client Relationship Form, Form CRS, or even ADV Part 3.
The intent of this new form is to provide your Retail Investors with the information needed for them to make an educated decision about whether to establish, engage, terminate, or switch their relationship with your firm. This new form is required for SEC registered investment advisors and registered broker dealers that have Retail Investors. You are required to file it with the SEC and deliver it to your Retail Investors, along with your other deliverables (ADV Part 2A, 2B, Privacy Notice, etc.). To top it all off, there are also very specific formatting requirements.
First, let’s determine if it applies to your firm
You only need to prepare, file, and deliver this new form if you have Retail Investors, defined by the SEC as:
“A natural person, or the legal representative of such natural person, who seeks to receive or receives services primarily for personal, family or household purposes.”
The term Legal Representative is defined as:
“Non-professional legal representatives acting as, for example, trustee, or managing agent”
Okay, so what does that mean?
Retail Investors are NOT:
- Institutional accounts
- Investment Advisors
- Broker Dealers
- Private Funds, such as Hedge Funds, Private Equity and Venture Capital
Retail Investors ARE:
- High Net Worth Individuals
- Trusts, Estates, or other similar entities if established for personal, family or household purposes
- Relationships with another Investment Advisor and/or Broker Dealer if your firm is retained to represent the assets of natural persons. Examples are sub-advisory arrangements or wrap programs.
If you have determined it DOES NOT apply to your firm, there is no need to read any further unless you are just super interested; then by all means, please continue.
If you have determined Form CRS DOES apply, please read on further for the requirements.
What topics must be covered?
This new form is essentially grabbing some key elements already disclosed in your ADV Part 2A. A brief overview of the required categories includes (NOTE: this is only meant to provide an overview of the categories, within the instructions you will find very specific disclosure requirements):
Include the date, your name, and clearly indicate that brokerage and investment advisory services differ and it’s important for the Retail Investor to understand the differences. Include links to additional tools and references for the Retail Investor.
- Relationships and Services
Disclose the principal services and material limitations in those services.
- Fees, Costs, Conflicts, and Standards of Conduct
Disclose the principal fees and costs associated with your services, including how frequently those fees are assessed and any conflicts that directly impact Retail Investors.
- Disciplinary History
Simply state here a “yes” or “no” as to whether you have disciplinary activity and provide direct links to where additional information regarding this disciplinary activity can be found.
- Additional Information
Provide contact details and information as to where the Retail Investor can find additional information about your firm’s services.
What are conversation starters?
Within the instructions, you will find the requirement to include “conversation starters” within each required category. For example, under the category for Relationships and Services, you must include the following question if you are an investment advisor:
“Given my financial situation, should I choose an investment advisory service? Why or why not?”
The point is to encourage the Retail Investor to start a conversation with your firm regarding their fees, services, conflicts, etc.
The details of the required conversations starters can be found within the instructions. If you are an internet advisor that does not have a direct relationship with the end client, you are still required to provide these conversation starters and the answers to each.
What are the formatting requirements?
- The form must include the five (5) categories identified above.
- You must respond to each category in the same order as it appears in the instructions.
- It must be in plain English, meaning:
- direct and concise
- short sentences and paragraphs
- use everyday words
- use an active voice
- avoid legal jargon or highly technical business terms
- avoid multiple negatives
- use “us,” “our firm,” and “you” as if you are directly speaking to the client
- Do not use boilerplate language
- Do not omit critical information
- It cannot exceed 2 pages if you are a registered investment advisor.
- It cannot exceed 4 pages if you are dually registered.
- The conversation starters must stand out by either using different font size or type or including within a text box.
Where and when must the form initially be filed?
Registered Investments Advisors will file it through IARD (same place you file your ADV part 1 and 2A).
Registered Broker Dealers will file it through Web CRD.
Dual registrants will file it in both places (Web CRD and IARD).
If you are already registered or have an application pending to be registered prior to June 30, 2020, you MUST file the form electronically no later than June 30, 2020. The form cannot by filed until May 1, 2020.
When must the form be initially delivered?
You must deliver Form CRS to each of your existing Retail Investors within 30 days of your first filing. So, for example, if you filed on June 30, 2020 you must deliver to each existing Retail Investor by July 30, 2020.
What are my on-going requirements for filing and delivery?
Investment advisors must deliver the form to each Retail Investor before or at the time of entering into the investment advisory contract. Even if your arrangement is verbal, the delivery requirement still applies.
Broker dealers must deliver the form to each Retail Investor before or at the time of:
- A recommendation of an account type, securities transactions or an investment strategy
- Placing an order for the Retail Investor
- Opening a brokerage account for the Retail Investor
You MUST update and file your form (either through IARD or Web CRD) within 30 days when any information becomes materially inaccurate. The amended form must include an exhibit highlighting the material changes.
Any updated form MUST be delivered to existing Retail Investors within 60 days after the changes have been made.
You must also deliver the most recent form to an existing Retail Investor if any of the following apply:
- You open a new account that is different from the Retail Investor’s existing account
- Recommend the Retail Investor roll over their assets from a retirement account into a new or existing account or investment
- Recommend or provide a new brokerage or investment advisory services or investment that does not necessarily involve the opening of a new account (i.e., the first-time purchase of a direct sold mutual fund or instruction product)
- Upon 30 days of the Retail Investor’s request.
You have six (6) months to develop the form and implement the additional procedures necessary to ensure full compliance with these updated rules. Here are our suggested next steps for your firm:
- Develop the form – work on it concurrently with the ADV or after it’s been filed to ensure consistency
- Update your policies and procedures – for updating, filing, and delivering the form as required
- Train staff on the requirements; especially those making the recommendations and communicating directly with the clients, so they know when to deliver the form
Keep an eye out for SEC Compliance Solutions’ Form CRS package — coming soon!