As the first filing deadline for the Securities and Exchange Commission’s (“SEC”) new Form CRS is approaching on June 30, 2020, the SEC Division of Investment Management and Division of Trading and Markets have published a frequently asked questions document in response to inquiries they have received. The SEC plans to continue to update responses to as it receives additional questions regarding the new regulation.
Form CRS is part of a regulatory disclosure package approved in June 2019. Aimed to increase the quality and transparency of retail investors’ relationships with advisers and broker-dealers, Form CRS requires that in two concise and easily understood pages (four pages for dually registered firms), advisers and broker-dealers provide very specific information regarding the relationship between the retail investor and the firm.
Relationship Summary and Format Questions:
All firms must prepare only one relationship summary even if it offers several different types of services to customers. (Dually registered firms may file two separate Form CRS, one describing their broker-dealer services and one outlining all of their adviser services.) The summary must provide information on all of the different relationships and services offered.
The staff responses provided two examples:
- “If an investment adviser offers a wrap fee program, advice to participants in a 401(k) plan, and discretionary asset management for high net worth clients, the investment adviser would be required to prepare a single relationship summary describing all of the firm’s different services.
- If a broker-dealer offers a range of brokerage services to retail investors, including, for example, self-directed, full-service, and employer-sponsored retirement plan options, the broker-dealer would be required to prepare a single relationship summary describing all of the firm’s different services.”
Additionally, the frequently asked questions document refers firms directly to software providers for technical questions on how to follow the appropriate instructions in order to comply with the formatting requirements, including the requirement that the headings be formatted to be machine-readable. The staff included sample steps for firms that work with Microsoft Word and Adobe.
Delivery Requirement Questions:
Since Form CRS is meant to be delivered to customers at the beginning of a relationship, many firms had inquired about the requirement to deliver the summary to existing retail customers. The staff response stated that firms would be in compliance to deliver its Form CRS to its existing clients separately, in bulk delivery to its clients, or as part of the delivery of information that the firm already provides, such as the annual Form ADV update, account statements or other periodic reports but listed some specific requirements depending on whether delivered in paper or electronic format:
- If delivered in paper format, Form CRS must be the first among any documents that are delivered at that time.
- If delivered electronically, Form CRS must be presented prominently as a direct link or in the body of an email message, easily accessible for retail investors.
Lastly, SEC staff stated that it does not view investment vehicles such hedge funds, private equity funds, and venture capital funds as a “natural person, or the legal representative of such natural person who seeks to receive or receives primarily for personal family or household purposes” and so firms are not required to deliver relationship summaries to those investment vehicles.
For a complete and updated list of the frequently asked questions, visit the SEC Frequently Asked Questions page.
Core Compliance and Legal Services, Inc. has published a summary of requirements for the new form CRS that may be helpful to review as your firm begins the process.
View the Blog post on Form CRS here.
Additionally, CCO’s Lead Senior Lead Compliance Consultant Tina Mitchell outlines the five items required in form CRS in a recent CCO Buzz podcast episode.
Core Compliance and Legal Services, Inc. can provide your firm and employees with guidance in drafting and filing Form CRS to ensure a seamless process toward compliance with this new regulatory disclosure. Contact us at 619-278-0020 for assistance from one of our experts.