SEC Issues New Guidance on Form CRS Disclosures

In further guidance on compliance with the broker-dealer/investment adviser-mandated Client Relationship Summary Form (“Form CRS”), the SEC Standards of Conduct Implementation Committee (“the Committee”) evaluated “whether the relationship summary is fulfilling its intended purpose.” The Committee was made up of SEC staff from the Division of Trading and Markets, the Division of Investment Management, the Division of Examinations, and the Office of Investor Education and Advocacy.

Disclosure Details

The Committee statement provides significant detail on specific disclosure topics as well as the content, format and posting requirements for the Form. In its review, the Committee considered a “diverse cross-section” of firm filings and previous regulator engagements covering both SEC and FINRA observations on implementation (referring back to a 2020 roundtable—see Bates summary). Here is a list of the latest highlighted concerns and key takeaways.

Plain English – The Committee reasserted that the summary must be “concise and direct” to best communicate to retail investors with varied financial experience. Based on their observations, they added that this means (i) avoid unexplained legal jargon or business terms, (ii) no unpermitted disclosures and (iii) no disclaimers or hedging language (i.e. no footnotes).   

Required Information – Do not to omit or modify required information including headings, conversation starters and prescribed language, particularly as they relate to (i) conflicts of interest, (ii) investment authority, (iii) monitoring services, and (iv) disciplinary history.

Reliance on Final Instructions Only – Firms should confirm that their CRS disclosures comply with the SEC’s final adopted instructions and not previous or proposed instructions.

Cross References – Firms should  provide cross references and links to more detailed information describing the firm’s services, fees (e.g. schedules related to particular services), costs and conflicts disclosures. The Committee noted that hyperlinks to Form ADV Part 2A or Reg BI disclosure were acceptable, though warned that failure to facilitate access to those disclosures was not acceptable.

Substantive Disclosures – It was reiterated that firms should: only include required disclosures; not omit material facts in light of the circumstances; not be misleading; be responsive and relevant and not include “impermissible, extraneous, or unresponsive” information.

Specifically, it was relayed that firms must:

• explain their monitoring practices on investments, including the frequency and any material limitations of that monitoring;
• describe the services of an adviser who has discretionary investment authority (including material limitations and any circumstances that would impact this authority) and—for advisers who do not offer discretionary services—that the retail investor makes the ultimate investment decisions;
• explain whether or not the firm offers limited investment advice on proprietary products and, if so, describe any limitations on these investment offerings;
• summarize the principal fees and costs for services, including how frequently they are billed and any conflicts of interest;
• describe any wrap fee program service offering including, in detail, related fees and costs;
• describe the standard of conduct applicable to firm professionals (note: couching the applicable standard as an explanation to mitigate a conflict of interest is not permitted); and
• summarize clearly how the firm’s financial professionals are paid, disclosing any potential conflicts of interest related to the firm’s compensation arrangements. (The Committee noted firms that provided “concrete examples to help investors understand the incentives associated with proprietary products, third party payments, revenue sharing, and principal trading.”)

Visit the Bates Reg BI and Form CRS Resource Page

Disciplinary History – Strict compliance must be adhered to when responding to questions on the disciplinary history of their financial professionals. Under the proper heading, the answer must be unambiguously yes or no, and the relationship summary must include the required conversation starters on the subject. Further, the Committee warned that firms do not have discretion to leave the disciplinary history answer blank or to omit reportable disciplinary history. In addition, they stated that firms must not add any language—including “qualitative or quantitative” language—that may minimize that history.

Websites – The Committee identified several issues for firms that post relationship summaries on websites. These include using features or links that pose difficulties for investors (i.e., that are hard or confusing to find, hyperlinks that are several clicks away from the homepage, small text, mistitling.) In short, relationship summaries posted on websites must be prominently displayed and formatted for easy investor access.

Affiliate Relationships – Firms should use clarity when describing their  relationship with affiliates. When a firm uses one relationship summary to describe affiliated relationships, it must display the brokerage and investment advisory information “with equal prominence, and clearly distinguish and facilitate comparison of the two types of services.” In all cases, firms must: (i) clearly state which firm offers which services or investment products; (ii) attribute disclosures to the particular firm providing the service, and (iii) describe fully the relationship between the firm and its affiliates.

Marketing Language and Boilerplate – The Committee emphasized that relationship summaries are not marketing material, and the information provided must be strictly factual, balanced and not contain sales “superlatives or similar descriptives.” Similarly, firms were reminded that the disclosures contained in the summaries must be tailored to the their “services, fees, relationships or conflicts” and not to use boilerplate language that may undermine an investor’s ability to understand the services offered or potential conflicts.

Design – Firms should design their relationship summaries to “help retail investors easily digest the information and enhance their understanding of the disclosures.” The Committee noted those firms that summarized information using graphs, charts and tables and those that used innovative approaches such as interactive features to enhance readability.

Conclusion

By issuing this additional guidance on the preparation of Form CRS, the SEC is communicating that firms need to pay more attention if the relationship summary is to fulfill its intended purpose of providing meaningful accessible information upon which investors can make reasoned choices as to financial professionals. As a practical matter, firms need to review the current version of their CRS to make sure that the highlighted issues are addressed for the new year.

How Bates Can Help

The Bates Compliance team helps BD, IA and hybrid firms meet their Form CRS and Reg. BI compliance obligations, including further defining conflicts, determining your disclosure approach and mitigating risk to your firm. We develop, review and update Form CRS and also support firms with Form CRS gap analyses, risk assessments, consistency reviews, and training. For a full list of services, visit our Reg. BI and Form CRS resource page.

To learn more about Reg BI and Form CRS compliance consulting support, including how your firm can improve its compliance, please contact us directly:

Rhonda Davis, Managing Director, Bates Compliance – rdavis@batesgroup.com or 713-410-3978

Rory O'Connor, Director, Bates Compliance – roconnor@batesgroup.com or 860-671-7270

Hank Sanchez, Managing Director, Bates Compliance – hsanchez@batesgroup.com or 504-450-9632