Compliance officers at investment advisory firms which serve retail clients will soon be impacted by the newly required relationship summary in Form ADV Part 3 (Form CRS).
Effective in the summer of 2020, advisers will be required to deliver Form CRS to retail clients that briefly summarizes the adviser’s services, fees and costs, disciplinary history, and conflicts of interest, among other topics.
The SEC has issued written instructions that provide detailed specifics of what information must be provided retail clients in Form CRS and how that information must be presented. From a content perspective, the most important thing advisory firms can do is identify conflicts of interest. That means being proactive in reviewing their practices concerning, among other things, the compensation that they, their affiliates, or their associated persons receive in connection with the investments they recommend and related services they provide. https://www.sec.gov/rules/final/2019/34-86032-appendix-b.pdf
What the SEC has Mandated
When it comes to Form CRS, how you convey required information is as important as the information itself. Since professional writing and graphic design skills often are in short supply at financial advisory firms, here’s a helpful checklist of what’s needed to successfully complete Form CRS for the first time.
- You must make a copy of the Form CRS available upon request without charge.
- The Form CRS for broker-dealers and investment advisers must not exceed two pages when delivered in paper format. For dual registrants that include their brokerage services and investment advisory services in one Form CRS, it must not exceed four pages.
- You must use reasonable paper size, font size, and margins. If delivered electronically, the Form CRS must not exceed the equivalent of two pages or four pages in paper format, as applicable.
- Since the required items of the Form CRS are designed to promote effective communication between you and retail clients, the Form CRS should be written in plain English, taking into consideration retail clients’ level of financial experience.
- A few writing tips: use short sentences and paragraphs; use definite, concrete, everyday words; use active voice; avoid legal jargon or highly technical business terms unless you clearly explain them; and avoid multiple negatives. The SEC’s Office of Investor Education and Advocacy has published A Plain English Handbook. You may find the handbook helpful. For a copy, visit the SEC’s website at sec.gov/news/extra/handbook.htm.
- Firms are encouraged to use charts, graphs, tables, and other graphics or text features in order to respond to the required disclosures. You are also encouraged to use text features, text colors, and graphical cues, such as dual-column charts, to compare services, account characteristics, investments, fees, and conflicts of interest.
The Form CRS must include certain questions referred to as “conversation starters”. For these, you must use text features to make them more noticeable and prominent in relation to other discussion text. This can be done by using larger or different font, a text box around the heading or questions; bolded, italicized or underlined text; or lines to offset the questions from the other sections.
Required Areas to Cover
- Include the date prominently at the beginning of the Form CRS. State the firm’s name and whether the firm is registered with the Securities and Exchange Commission as a broker-dealer, investment adviser, or both.
- Also indicate that brokerage and investment advisory services and fees differ and that it is important for the retail client to understand the differences.
- State that free and simple tools are available to research firms and financial professionals at Investor.gov/CRS, which also provides educational materials about broker-dealers, investment advisers, and investing.
Relationships and Services
- Use the heading: “What investment services and advice can you provide me?”
- State that you offer brokerage services, investment advisory services, or both, to retail clients, and summarize the principal services, accounts, or investments you make available to these types of clients, and any material limitations on such services.
Fees, Costs, Conflicts, and Standard of Conduct
- Use the heading: “What fees will I pay?”
- Summarize the principal fees and costs that retail clients will incur for brokerage and/or investment advisory services, including how frequently they are assessed and the conflicts of interest they create.
- Use the heading: “Do you or your financial professionals have legal or disciplinary history?”
- State where the retail investor can find additional information about your brokerage or investment advisory services and request a copy of the relationship summary. This information should be disclosed prominently at the end of the relationship summary.
- Include a telephone number where retail investors can request up-to-date information and request a copy of the relationship summary.
Peace of Mind
Our experienced team of consultants at Core Compliance & Legal Services can provide you and your staff with valuable guidance in drafting and filing the new Form CRS to meet the applicable SEC filing deadline below:
- Investment advisers who are already registered or have an application for registration pending with the SEC before June 30, 2020 must electronically file the Form CRS beginning on May 1, 2020 and by no later than June 30, 2020 either as: (1) another than-annual amendment or (2) part of the initial application or annual updating amendment. After June 30, 2020, the Commission will not accept any initial application that does not include a Form CRS. Broker-Dealers. Broker-dealers will File Form CRS electronically through the Central Registration Depository (“Web CRD”).
- Broker-dealers who are already registered with the SEC as a broker-dealer before June 30, 2020 must electronically file the Form CRS beginning on May 1, 2020 and by no later than June 30, 2020. Broker-dealers who have filed an application for registration or have an application pending with the SEC as a broker-dealer on or after June 30, 2020 must file Form CRS by no later than the date that registration becomes effective.
Contact us at (619) 278-0020 to schedule a consultation to help you through your first Form CRS filing experience.