On December 17th, 2021, the Securities and Exchange Commission's (“SEC”) Standards of Conduct Implementation Committee released a statement regarding Form CRS. The Committee's document provides examples of compliance shortcomings and best practices found during recent reviews of registered investment adviser ("RIA") firm's Form CRS filings.
Below we discuss the key takeaways from the SEC's statement to help firms improve their customer relationship summaries.
Firms are required to file the customer relationship summary, also known as Form CRS with the SEC, and also distribute the disclosure document to their current and prospective retail investors in plain English. Form ADV Part 3 ("Form CRS"), is an addition to the Form ADV Part 1 and Part 2 Brochure.
According to the SEC, the Form CRS "is intended to inform retail investors about: (i) the types of client and customer relationships and services the firm offers; (ii) the fees, costs, conflicts of interest, and required standard of conduct associated with those relationships and services; (iii) whether the firm and its financial professionals currently have reportable legal or disciplinary history; and (iv) how to obtain additional information about the firm."
Form CRS has recently become a popular topic of discussion within the wealth management industry, due to concerns about how well the document fulfills its intended purpose for investors.
During the recent reviews, the Committee made the following observations and recommendations:
- Firms must avoid legal jargon and technical business terms, such as “riskless principal”, “in arrears”, “markups” and “markdowns”. The use of technical language and disclaimers decreases the comprehension of investors. Keep the language clear and concise, for investors with basic financial knowledge to understand the important information provided.
- Do not omit required disclosures, such as headings, conversation starters, and prescribed language, unless they are inapplicable to the firm's business. Examples of flagged omissions observed were related to conflicts of interest, investment authority, monitoring services, and disciplinary history.
- Follow the final instructions to Form CRS. Observed firms mistakenly used language from the proposed instructions, with incorrect conversation starters and/or conduct language, which ultimately alters the transparency, consistency, and comparability of information across the relationship summaries of different firms.
- Firms need to provide more specific information and/or references in the summary sections related to their services, fees, costs, and conflicts of interest. This information must match the details provided on Form ADV, Part 2A. If the Form CRS states that more detailed information can be provided in the firm’s Form ADV, there must be a method to readily access that information, such as a hyperlink to the referenced document.
- The relationship summary must be prominently displayed on the firm's website.
- Include more detailed descriptions in the following areas of disclosure:
- Monitoring of retail investors' investments
- Investment authority
- Limited investment offerings
- Principal fees and costs
- Wrap fee program offerings and fees
- Required language related to standards of conduct
- Firm and financial professional compensation arrangements and conflicts of interest
- Firms cannot omit information or fail to respond to the disciplinary history disclosure.
- Include clear descriptions of any affiliated firms
- Firms are expected to use required text features and certain design elements, such as charts or graphs, to make Form CRS easy to read and understand for investors.
- Refrain from using marketing language, such as superlatives or language promoting the firm's abilities.
- Tailor the boilerplate to the firm's particular services, fees, relationships, and/or conflicts. The boilerplate should not contain vague and imprecise explanations that may hinder transparency or comparability between firms. Do not use language based on widely shared relationship summary templates without tailoring the language to the firm's practice.
As a reminder, all RIA firms, whether registered at the SEC or state level, will also need to file the required Form ADV amendment within 90 days of the firm’s fiscal year-end (generally March 31, 2022 with a traditional December 31, 2021 fiscal year end date). In addition, SEC-registered firms may need to file an amendment to their firm's Form ADV part 3 (Form CRS). While submitting an annual amendment to the Form CRS may not be required, it may be necessary if material changes have been made.