08 May 2020
Main Contributor: Katie Mogan, IACCP® Vice President, Senior Compliance Consultant
SEC Risk Alert: Form CRS
On April 7, 2020, the Office of Compliance Inspections and Examinations (“OCIE”) issued a risk alert to let advisors and broker-dealers know that, regardless of COVID-19, it’s business as usual at the SEC and firms must continue to meet their filing and delivery obligations of Form CRS. OCIE will most likely be conducting examinations following the compliance date of June 30, 2020 to assess compliance with the requirements.
What is the SEC looking for?
The SEC provided a summary of what they “may” be requesting and reviewing during these exams.
Delivery and Filing Requirements
The initial Form CRS is due to be filed with the SEC and posted to your firm’s website by June 30th, 2020. It must also be delivered to all existing clients within 30 days following the filing with the SEC, no later than July 30th, 2020.
You must also deliver Form CRS to existing clients (following the July 30th deadline), either before or at the time of:
- Opening a new account that is different from their existing account,
- Recommending a rollover of assets from a retirement account into a new or existing account, or
- Recommending a new service or investment that does not necessarily involve the opening of a new account (i.e., first-time purchase of a direct-sold mutual fund).
You must also deliver Form CRS to any new clients (following the July 30th deadline), either before or at the time of:
- Entering into a contract with the retail investor,
- Recommending an account type, securities transaction, or investment strategy,
- Placing an order, or
- Opening a brokerage account.
The SEC indicated they may review whether a firm has complied with these requirements and evaluate the firm’s process and written policies for compliance.
SCS Tip: Maintain documentation to support you met the deadlines and update your policies and procedures. Please let us know if you would like example policies to incorporate into your existing manual.
Content and Format Requirements
The Form CRS Instructions are precise regarding disclosures and formatting.
The SEC may assess whether firms have:
- Included all the required information, and
- Whether that information is true and accurate and does not omit material facts.
The SEC indicated they may confirm the following areas:
- The description of relationships and services offered to retail investors, including statements regarding account monitoring and investment authority:
- Account monitoring must be consistent with the Review of Accounts section of your ADV Part 2A
- Investment Authority must be consistent with Investment Discretion section of your ADV Part 2A and clearly disclose what it means to offer either discretionary or non-discretionary services (i.e. you either do or do not obtain advance permission from the client prior to buying or selling securities)
- The description of how your Firm is paid and the costs clients will incur:
- This description must be consistent with the Fees and Compensation section of your ADV Part 2A
- The SEC may also ask to see account agreements to confirm consistency
- The description of how your financial professional are paid and the conflicts this presents:
- This description is not currently a disclosure requirement on the ADV Part 2A, but the SEC may ask to see documentation to support the accuracy of your disclosures (i.e., wage reports, financials, etc.)
- The description of conflicts of interest, including incentives related to proprietary products, third-party payments, revenue sharing, and principal trading:
- These can be addressed in many areas of your ADV Part 2A, depending on applicability. The key is to make sure that your disclosures are consistent in both documents.
- Whether or not you accurately disclose legal or disciplinary activity:
- This disclosure must be consistent with the Disciplinary Activity section of the ADV Part 2A and any Investment Advisor Representative or Registered Representatives U4.
SCS Tip: Make sure you have read and fully understand the requirements. The information must be accurate AND consistent with related documents (i.e., agreements, ADV). Let us know if you would like a checklist of the requirements.
Update and Recordkeeping Requirements
You are required to update and file the Form CRS within 30 days after information becomes materially inaccurate and communicate these changes to retail investors within 60 days after you’ve made the updates. An exhibit must summarize material changes and accompany Form CRS.
The SEC will want support to substantiate the requirements and may review your policies to confirm how your firm maintains those records.
SCS Tip: Make sure you update your policies and procedures to address these requirements. Please let us know if you would like example policies to incorporate into your existing manual.
It comes as no surprise that if you have retail investors, you must read and re-read the instructions to ensure your firm fully understands the requirements. We also highly suggest a quick training session with the relevant staff (those communicating with clients and creating the Form CRS) on the requirements. We will learn a lot from the SEC’s exam initiative. More than likely, we can expect another risk alert following the exams summarizing their findings with suggestions to improve the Form and process and their intent on the requirements. Don’t stress about the Form; just do your best, be honest and accurate, and pay attention to future alerts and recommendations, and be ready to quickly adapt.