The SEC released updates to Form CRS in 2020 with additions to their Form CRS FAQ, this time focusing on the Disciplinary History section. After so many updates, it is a good idea to go back through to refresh your memory.

Updates to Form CRS in 2020:

  • Scope of Form CRS Requirements
  • Retail Investor
  • Relationship Summary Format
  • Filing Requirements
  • Delivery Requirements
  • Disciplinary History
  • Plain English; Fair Disclosure
  • Record keeping and Record making

This blog will cover the updates for Scope of Form CRS Requirements, Retail Investor, Relationship Summary Format, Filing Requirements, and Delivery Requirements. The rest will be covered in part 2 of this blog which you can find here.

Scope of Form CRS Requirements (June)

This section just states that you do not have to deliver a Form CRS if you do not have any retail clients.

Retail Investor (February)

The SEC update for this section clarifies who a “Legal Representative” is for the definition of a retail investor. The Commission states that the term only applies to “Non-Professional Legal Representatives”, meaning non-professional trustees that represent the assets of natural persons and similar representatives such as executors, conservators, and persons holding a power of attorney for a natural person. The term excludes regulated financial services industry professionals, such as RIAs and BDs.

Relationship Summary Format (June)

The update here defines the extent to which a firm can modify the specific wording required in Form CRS. The SEC, in limited circumstances, provides 2 instances where you can omit or modify a required disclosure:

  1. When it is inapplicable to your business; or
  2. The specific wording required by the Instructions is inaccurate

But in most cases, you will be required to answer each item in the order and without disclosures unless specifically required or permitted. The Commission notes that this form is designed to serve as a disclosure, not marketing material. They also state that all the information must be true and not omit any material facts to ensure the reader is not mislead.

Filing Requirements (April)

The first part of this section explains how to file the relationship summary as a RIA, BD, or dually registered firm. RIAs must file Form ADV Part 3 electronically through Investment Adviser Public Database (IARD). Their relationship summary will be publicly disseminated through the IARD.

BDs must file Form CRS electronically through FINRA’s Web CRD. Their relationship summary will be publicly disseminated through BrokerCheck.

Dually registered firms must file their BD relationship summary and their IAR summary (whether prepared as a combined relationship summary or separate summaries) as Form ADV Part 3 through IARD. The Commission goes into further detail for filing as a dually registered firm, if you are interested, check out the FAQ here.

The second part states that one firm cannot file a combined relationship summary on behalf of their affiliate. Each firm is required to file the combined relationship summary. Checking the box indicating whether your relationship summary includes “affiliate information” does not satisfy the filing obligation for your affiliate.

Delivery Requirements (April)

The Commission starts by explaining how firms should go about delivering its relationship summary in advance of the compliance date. If a firm chooses to do this, generally they should:

  1. post the relationship summary on the firm’s public website as described in General Instruction 10 to Form CRS;
  2. Comply with the updating and related delivery requirements of General Instructions 8 and 9 to Form CRS; and
  3. File its relationship summary with the SEC.

They then go on to define what triggers the delivery obligation for a Relationship Summary:

  1. A recommendation of an account type, a securities transaction, or an investment strategy involving securities;
  2. Placing an order for the retail investor; or
  3. The opening of a brokerage account for the retail investor.

The SEC then goes on to clarify the deliver requirements for two specific situations. The first situation being:

  1. A firm (Firm A) provides investment advisory services to an unaffiliated investment advisor (Firm B). Firm B provides investment advisory services to retail investors. Firm A has no contact with Firm B’s clients.

In this case, disregarding any other circumstances, the Commission states that the relationship summary would not require delivery. In the second situation:

  1. There are two unaffiliated firms, Firm A and Firm B, who have some financial professionals licensed as a IAR at Firm A and a RR at Firm B.

Unaffiliated firms are treated as standalone BDs and RIAs and are independently responsible for delivery of their relationship summary. However, if a dually registered financial professional offers services to a retail customer, each firm is obligated to deliver a relationship summary if the event triggers their respective delivery obligations.

Check out the FAQ for the complete list of updates to the Delivery Requirements section.

If you want to learn more about best practices on how to establish an effective compliance program with controls in place to stay compliant with teh updates to Form CRS in 2020 and more, please contact our expert team of compliance professionals.