SEC Staff Provides Form CRS Observations, Expectations, and Best Practices

On December 17, 2021, the staff of the U.S. Securities and Exchange Commission issued a statement regarding Form CRS disclosures required of SEC-registered broker-dealers and investment advisers who offer services to retail investors.^[1] The staff statement summarizes observations of the Standards of Conduct Implementation Committee based on its review of filed relationship summaries from a diverse cross section of firms, particularly focused on whether and how firms have implemented the content and format requirements of Form CRS.^[2] The Committee observed “good examples of simple, clear disclosures, including relationship summaries that provided balanced and objective descriptions of services, direct and concise explanations of fees, and avoided extraneous language and legal jargon,” but also areas where compliance improvements are needed.

Firms should consider reviewing their relationship summaries to ensure that the information they contain remains accurate and up to date. Implementing a formal plan for periodic review may help in this endeavor. We prepared a chart that sets forth the Committee’s observations in an easy-to-review manner, which firms may take into account during these reviews. Below is a shorter list of examples of checkups firms should consider related to substance and process:

1. Eliminate any legalese or jargony text. “Plain English” disclosures and explanations are the required standard.
2. Verify that the standardized headings, “conversation starters,” formatting, ordering of the text, and page limitation are consistent with Form CRS requirements. Form CRS instructions provide a specific roadmap in this regard, but surprisingly it is an oft-missed area for firms.
3. Examine whether your process for delivering your relationship summary and subsequent updates satisfies applicable requirements. Critical points in time are before or at the time a retail investor enters into a relationship with you and when changes are made to the services you provide.^[3]
4. Ensure that hyperlinks in your relationship summary are functioning and redirecting readers to the intended destination. “Layered” disclosures via hyperlinks are permissible.
5. Confirm that the description of the services you offer remains accurate. Expansion and evolution of services and client base may require that you update your relationship summary if it becomes materially inaccurate.
6. Determine whether your fee model (with clients) or compensation structure (with your personnel) has changed such that you would need to update the description in your relationship summary. Newly applicable fees are an oft-missed addition to firms’ relationship summaries.
7. Consider whether any new conflicts of interest exist that you should disclose in your relationship summary. Conflicts can crop up or evolve related to products, relationships, and various other areas.
8. Account for any recent disciplinary history for your firm or your personnel if it would change your response from “no” to “yes” or vice versa. Staffing changes are a key area of observed misstatements in this required section of disclosure.
9. Check that you have properly posted the current version of your relationship summary on your firm’s public website, if one exists. The posting must be “prominent” and in a location and format that is easily accessible for retail investors.

The staff statement is yet another reminder that the Divisions of Examinations and Enforcement are focused on compliance with Form CRS obligations. For example, in July 2021, the SEC announced settlements with 21 investment advisers and six broker-dealers related to alleged failures to timely file and deliver to retail investors the required relationship summaries and failures to properly post them on firm websites. These initial settlements focused very little on substance, which is consistent with the April 2020 Risk Alert in which SEC staff indicated that initial examinations surrounding compliance with Form CRS requirements would “focus on assessing whether firms have made a good faith effort to implement Form CRS.” In other words, the staff signaled then that they would not come after firms that attempted to comply with the new requirements, even if they fell short of perfection.

Firms are now on notice to shape up on substance as well as the basic form and process requirements. We also expect to see Form CRS discussed in the upcoming, annual exam priorities letter from the SEC Division of Examinations. This will likely culminate in additional enforcement actions in 2022 against firms that fail to heed these warnings.

Finally, broker-dealers and investment advisers should be mindful of whether future business plans include offering services to retail investors for the first time, such that preparing, filing, and delivering an initial relationship summary would be necessary.

^[1]See Rule 17a-14 under the Securities Exchange Act of 1934 and Rule 204-5 under the Investment Advisers Act of 1940.
^[2]The Committee is comprised of staff from the Division of Trading and Markets, the Division of Investment Management, the Division of Examinations, and the Office of Investor Education and Advocacy.
^[3]More specifically, these points in time are: (a) before or at the earliest of: (i) a recommendation of an account type, a securities transaction, or an investment strategy involving securities; (ii) placing an order for a retail investor; or (iii) the opening of a brokerage account for a retail investor for a broker-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 that is different from a retail investor’s existing account(s); (ii) recommend that a retail investor roll over assets from a retirement account into a new or existing account or investment; or (iii) recommend or provide a new brokerage or investment advisory service or investment that does not necessarily involve the opening of a new account and would not be held in an existing account;” and (d) upon request by a retail investor.