On December 17, 2021, staff at the United States Securities and Exchange Commission issued a statement regarding the CRS Form Disclosures required of SEC-registered dealers and investment advisers who provide services to retail investors. The staff statement summarizes the observations of the Standards of Conduct Implementation Committee based on its review of relationship summaries filed by a representative sample of companies, with a particular focus on whether and how companies have implemented the content and format requirements of the CRS form. The Committee observed “good examples of straightforward and clear disclosures, including relationship summaries that provided balanced and objective descriptions of services, straightforward and concise explanations of fees, and avoided unnecessary language and legal jargon,” but also areas where improvements in compliance are needed.
Businesses should consider reviewing their relationship summaries to ensure that the information they contain remains accurate and up to date. Implementing a formal periodic review plan can help in this endeavor. We have prepared a table that presents the Committee’s observations in an easy-to-review manner that firms can take into account in these reviews. Below is a shorter list of example reviews that companies should consider in terms of substance and process:
- Eliminate any jargon or jargon text. Disclosures and explanations in “plain English” are the required standard.
- Check that the standardized headings, “conversation starters”, formatting, text order, and page limitation meet the requirements of the CRS form. The CRS form instructions provide a specific roadmap in this regard, but surprisingly, this is an area often missed for businesses.
- Check whether your process for delivering your relationship summary and subsequent updates meets the applicable requirements. Critical times are before or when a retail investor comes into contact with you and when changes are made to the services you provide.
- Make sure the hyperlinks in your relationship summary are working and directing readers to the intended destination. “Layered” disclosures via hyperlinks are permitted.
- Confirm that the description of the services you offer is correct. Expansion and evolution of services and customer base may require you to update your relationship summary if it becomes materially inaccurate.
- Determine if your compensation model (with clients) or your compensation structure (with your staff) has changed such that you would need to update the description in your relationship summary. The newly applicable fees are an often missed addition to corporate relationship summaries.
- Determine if there are any new conflicts of interest that you should disclose in your relationship summary. Conflicts can arise or evolve based on products, relationships and various other areas.
- Consider the recent disciplinary history of your company or staff if this changes your answer from “no” to “yes” or vice versa. Staff changes are a key area of anomalies observed in this mandatory disclosure section.
- Check that you have correctly posted the current version of your relationship summary on your company’s public website, if one exists. The display must be “visible” and in a location and format readily accessible to retail investors.
The staff statement is another reminder that the reviews and enforcement divisions are focused on meeting CRS form obligations. For example, in July 2021, the SEC announced settlements with 21 investment advisers and six brokers related to alleged failures to timely file and provide retail investors with required relationship summaries and not properly post them on business websites. These initial regulations focused very little on substance, which is consistent with the April 2020 risk alert in which SEC staff indicated that initial reviews surrounding compliance with CRS Form requirements “will focus on the assessment of the good faith of companies to implement the CRS form. In other words, the staff then signaled that they would not tackle companies that tried to comply with the new requirements, even if they did not achieve perfection.
Companies are now invited to train on the substance as well as on the basic requirements in terms of form and process. We also expect the CRS form to be discussed in the next annual review priority letter from the SEC’s Examinations Division. This will likely result in additional enforcement actions in 2022 against companies that ignore these warnings.
Finally, brokers and investment advisers should be aware of whether future business plans include offering services to retail investors for the first time, so that the preparation, filing and provision of an initial summary of the relationship would be necessary.
See rule 17a-14 of the Securities Exchange Act of 1934 and rule 204-5 of the Investment Advisers Act of 1940.
The committee is made up of staff from the Trading and Markets Division, the Investment Management Division, the Examinations Division, and the Office of Investor Education and Advocacy.
More specifically, these times are: (a) before or at the earliest: (i) a recommendation of an account type, a securities transaction or an investment strategy involving securities; (ii) place an order for a retail investor; or (iii) the opening of a brokerage account for a retail investor for a securities dealer, and before or at the time an investment advisory contract is entered into with a retail investor for an investment adviser; (b) when the relationship summary is updated; (c) “before or at the time you: (i) open a new account different from the existing account (s) of a retail investor; (ii) recommend that a retail investor renew the assets of a retirement account to a new or existing account or investment; or (iii) recommend or provide a new brokerage or investment advice service or an investment which does not necessarily involve the opening of a new account and which would not be held in an existing account; And (d) at the request of a retail investor.