SEC Enforcement Actions Send a Stark Message: The Transition Period for Form CRS Has Ended

If firms needed a resounding wake-up call regarding the importance of delivering newly required client relationship summaries (Form CRS) to retail investors in a timely manner, the U.S. Securities and Exchange Commission (SEC) has provided one.

On July 26, 2021, the SEC filed 27 enforcement actions with combined civil penalties of $910,092 against firms that had neither delivered Form CRS to retail clients nor posted it to their website. In addition to missing the deadline for Form CRS, none of the 27 firms took needed action until regulators reminded them not once, but twice.

Form CRS was adopted to protect and inform retail investors. It outlines a firm’s fees, services, potential conflicts of interest, and disciplinary history to help clients and prospective customers decide whether to do business with a firm.

Challenges with Implementation

Although the transition period to Form CRS officially ended July 30, 2020, the SEC and the Financial Industry Regulatory Authority (FINRA) were mindful of extenuating circumstances created by the COVID-19 global pandemic. Nevertheless, the implementation of Form CRS has proven to be challenging.

One media investigation found that as many as 20% of firms that reported on their forms had no previous disciplinary incidents actually did. In March, the SEC’s Division of Examinations said it was focusing on “hundreds” of firms that should have filed Form CRS, but had not yet done so.

Firms that have failed to deliver and post Form CRS can’t say the SEC and FINRA didn’t warn them. Both regulators have been clear that compliance with Form CRS sits atop their lists of enforcement priorities this year, the SEC for investment advisors and FINRA for broker-dealers.

What Regulators Require

The goal under Form CRS and its related rules is similar to the Disclosure Obligation under Regulation Best Interest (Reg BI) – to provide the investor with information to make an informed decision on whether to invest with a particular firm. Reg BI states that when making a recommendation of any securities transaction or investment strategy involving securities (including account recommendations) to a retail customer, a broker-dealer must act in the best interest of the retail customer at the time the recommendation is made, without placing its own financial or other interest ahead of the retail customer’s interest.

Under Reg BI, a “retail customer” is “a natural person or the legal representative of such natural person, who: (A) receives a recommendation of any securities transaction or investment strategy involving securities from a broker, dealer, or a natural person who is an associated person of a broker or dealer; and (B) uses the recommendation primarily for personal, family, or household purposes.”

A Call to Action

If your firm has yet to comply with Form CRS, it should move to the top of your compliance to-do list. Disclosure requirements, and other regulatory record requirements, which protect and inform retail investors also offer good protection for your firm. Should one of your client’s adult children have the opportunity to take a look at their future inheritance and then decides to come after your firm for allegedly unsuitable investments, up-to-date records, such as a properly completed Form CRS, can be quite handy.

The securities industry can be quite confusing for the average investor who turns to pros to trust their nest egg. That’s why providing the required necessary information on Form CRS isn’t limited to checking a box on your compliance to-do list. It’s a helpful business practice and implies good common sense.

And if your firm is given notice by regulators to comply with a specific regulation, handle it the first time. Ignoring it and waiting for a second reminder is a very high risk. Better yet, properly format and fill the two pages of Form CRS and deliver it to clients and post it to your website on time.

Are you overwhelmed by a growing list of regulatory requirements? Having capable teams internally and externally to develop and maintain a strong compliance oversight program can help you sleep at night. Contact Core Compliance & Legal Services today to schedule a consultation.


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