In addition to a detailed narrative discussing the rationale for the new Form CRS, the SEC also released proposed "general instructions" for the Form CRS and a hypothetical mock-up summary to depict how the Form CRS could look for an RIA firm. When describing the logic behind the introduction of the new Form CRS requirement for both broker-dealers and registered investment adviser firms, the SEC states:
"We recognize the benefits of retail investors having access to diverse business models and of preserving investor choice among brokerage services, advisory services, or both. We also believe that retail investors need clear and sufficient information in order to understand the differences and key characteristics of each type of service. Providing this clarity is intended to assist investors in making an informed choice when choosing an investment firm and professional, and type of account to help to ensure they receive services that meet their needs and expectations."
In regards to the rationale behind the proposed format of the Form CRS, the SEC notes:
We are promoting these goals through specifying much of the content and presentation of Form CRS in the form’s instructions (“Instructions”); while firms will be required to include firm-specific information in Form CRS, they will have limited discretion in the scope and presentation of that information.
Proposed Form ADV Part 3 (Form CRS) Format
The SEC appears committed to ensuring the Form CRS is designed in a concise, retail investor-friendly format that is easy to understand and written in plain language. The proposed instructions note, "The items of the relationship summary are designed to promote effective communication between you and retail investors. Write your relationship summary in plain language, taking into consideration retail investors’ level of financial experience. The relationship summary should be concise and direct." In addition, the SEC has proposed these eight defined sections of the new Form CRS:
- Item 1: Introduction
- Item 2: Relationship and Services
- Item 3: Standard of Conduct
- Item 4: Summary of Fees and Costs
- Item 5: Comparison to be provided by standalone investment adviser
- Item 6: Conflicts of Interest
- Item 7: Additional Information
- Item 8: Key Questions to Ask
Each proposed section includes detailed instructions and required language to be provided depending on the type of relationship (e.g. standalone investment adviser, standalone broker dealer, or dual registrant). For example, item 8 would require ten predefined questions to be included that can be modified if inapplicable to a firm's particular business model.
In regards to the proposed length and format of the Form CRS, the proposed instructions state "Whether in electronic or paper format, the relationship summary must not exceed four 8½” x 11” pages if converted to PDF format, using at least an 11 point font size and a minimum 0.75” margins on all sides." In addition, "The relationship summary must include the required items enumerated below. The items require you to provide specific information and, in some cases, prescribe the particular wording that you must use."
Potential Next Steps for RIA firms if the Proposed Form CRS Rule is Finalized
If this rule proposal is finalized after the current 90 day public comment period, existing SEC-registered RIA firms would need to file an initial Form CRS as part of the firm's next annual Form ADV updated amendment required to be filed six months after the effective date of the new rule. As currently proposed, the new Form ADV Part 3 (Form CRS) would be filed via the Investment Adviser Registration Depository ("IARD") filing system.
In addition, RIA firms would need to deliver the new relationship summary document to new and prospective retail clients as of the date the firm is first required to electronically file the Form CRS. In addition, within 30 days of when the firm is first required to file the Form CRS, the firm would also need to deliver the relationship summary document to existing retail clients. The SEC is also proposing that "You must post the current version of the relationship summary prominently on your public website, if you have one, in a location and format that is easily accessible for retail investors."
Going forward, an RIA firm would be required to update the Form CRS within 30 days whenever any information on the relationship summary became materially inaccurate. In addition to filing the amended Form CRS on the IARD filing system, the RIA firm would also need to provide the amended relationship summary to existing retail clients within 30 days as well.
Be sure to check back soon as we continue to further analyze and follow the latest developments of this new proposed rule.
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.