RIA Compliance and Practice Management Blog

SEC Issues Risk Alert on RIA Form CRS Compliance Examinations

Posted by RIA in a Box

Apr 9, 2020 8:47:43 AM

SEC risk alert on RIA Form CRS audits and focus areasOn April 7, 2020, the Securities and Exchange Commission ("SEC") Office of Compliance Inspections and Examinations ("OCIE") released a new risk alert with information about the scope and content of initial examinations after the June 30, 2020 compliance date for the Form CRS (“ADV Part 3”). The new Form CRS rule requires certain SEC-registered investment adviser ("RIA") and broker dealer firms to provide a brief relationship summary to new and existing retail investors known as the Form CRS. The new Form CRS is a somewhat prescriptive two page document with five mandated sections. Investment advisers subject to the new requirement must file their initial relationship summaries with the Commission starting on May 1, 2020 and no later than June 30, 2020, using the Investment Adviser Registration Depository(“IARD”) system. In addition, firms must post the new Form CRS in a readily accessible spot on their firm's website. 

Download our Infographic Outlining the 5 Form CRS Requirements

According to the recent risk alert, "After the compliance date, OCIE will begin examinations to assess compliance with Form CRS. Initial examinations will focus on assessing whether firms have made a good faith effort to implement Form CRS." The SEC outlined the following examples of areas staff may focus on during an exam as it relates for Form CRS: 

  • Delivering and Filing: Has the firm filed its relationship summary with the commission and posted it on their public facing website? In addition, SEC examination staff will review the firm's policies and procedures to assess whether they address the required relationship summary delivery processes and required compliance dates.
    • Existing Retail Investors: Firms are required to initially deliver the new Form CRS to existing retail investors by no later than July 30, 2020. In addition, the relationship summary should also be delivered in additional scenarios such as “the opening of a new account that is different from the retail investor’s existing account.”
    • New Retail Investors: When engaging with new retail investors, the relationship summary must be delivered “before or at the earliest of 1) entering into an investment advisory contract with the retail investor; 2) A recommendation to a retail investor of an account type, a securities transaction, or an investment strategy involving securities; 3) placing an order for the retail investor (or); 4) the opening of a brokerage account for the retail investor.”
  • Content: During a regulatory audit, the firm’s relationship summary may be reviewed to assess whether all required information is included and the information contained is true and accurate and does not omit any material facts. Staff may review relationship summaries with a particular focus on these areas:
    • How the firm describes the relationships and services it offers to retail investors
    • How the firm describes its fees and costs
    • How the firm describes the manner in which its financial professionals are compensated
    • How the firm describes its conflicts of interest
    • Whether the firm accurately discloses if the firm or its financial professionals have legal or disciplinary history
  • Formatting: Does the relationship summary comply with the formatting outlined in the finalized rule.
  • Updates: One of several the areas mentioned in the release where examination staff may review a firm’s policies and procedures for updating the relationship summary includes "to assess how and whether a firm updates and files its relationship summary within 30 days after any information becomes materially inaccurate."
  • Recordkeeping: The release states, “Staff may review the firm’s records related to delivery of the relationship summary, and the policies and procedures regarding record-making and recordkeeping, to assess how the firm complies with applicable delivery and recordkeeping obligations.”

When drafting the Form CRS, in this risk alert, the SEC is further highlighting that RIA firms need to be very careful and clear as it relates to fees and expenses (including fees investors may pay in addition fees assessed by the RIA firm), conflicts of interest, and disciplinary history. RIAs should expect those sections of the Form CRS to receive particular scrutiny during examinations. While much of the attention to date has rightfully been placed on the initial creation and distribution of the new Form CRS, as this risk alert highlights, advisory firms also need to make sure they are updating their firm's compliance policies and procedures to ensure there are strong processes in place to update the Form CRS when necessary and to also meet the new recordkeeping requirements.

At RIA in a Box, we assist all MyRIACompliance subscribers with the creation of the new Form CRS for no additional charge via our automated online Form CRS creation tool. In addition, we have a dedicated resource page accessible to the public which shares an overview of Form CRS submission requirements and relevant checklists and links. The resource page will continue to be updated with resources and details as they become available.

Be sure to check back soon as we continue to provide updates on the new Form CRS requirement and other relevant RIA regulatory compliance focus areas.

Contact RIA in a Box to create your firm's Form CRS

 

Topics: RIA Operations, RIA Compliance

RIA in a Box LLC is not a law firm, investment advisory firm, or CPA firm. RIA in a Box LLC does not provide legal advice or opinions to any party or client. You should always consult your relevant regulatory authorities or legal counsel if applicable.

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