As the regulatory landscape is constantly evolving, Compliance Risk Concepts (“CRC”) is issuing its monthly […]
As firms prepare their annual ADV updates or review their compliance programs, one area where advisers and brokers who provide services to retail clients should highlight is Form CRS.
On December 17, 2021, the staff of the U.S. Securities and Exchange Commission issued observations and guidance regarding Form CRS disclosures required of SEC-registered broker-dealers and investment advisers who offer services to retail investors. The statement provides insight into CRS findings for recently examined firms. While SEC staff notes that they did observe appropriately drafted Form CRS samples from various firms, there were consistent issues found across a broad sampling within the industry. Areas where CRS improvements were most frequently noted are described below and represent areas where firms should pay close attention when reviewing the CRS to see if updates are necessary, whether or not material changes have occurred this year.
Areas of Focus
The purpose of Regulation Best Interest and the Form CRS is to create transparency within the financial service industry. As such, the Form CRS should not contain legal jargon or esoteric industry terms that may inhibit comprehension amongst retail investors.
Firms were cited for including the text of links in their Form CRS which did not navigate to the correct destination or were not actually live hyperlinks. All hyperlinks to regulatory resources or additional disclosure must be live.
Perhaps the most common deficiency cited amongst broker-dealers and investment advisers was their failure to properly deliver or evidence such delivery of Form CRS. Ensure that the Form CRS is delivered at the appropriate point in a retail client’s relationship with the firm. Policies, procedures, training, and recordkeeping should all support this distribution process.
Many firms were cited for failure to comply with the formatting requirements imposed by the Form CRS instructions. Firms should take care to confirm that all required headings, conversation starters, emphasized text, etc. are included throughout the document.
Conflicts of Interest
Conflicts of interest are not static and can evolve over time as industry relationships, products, client-base, fee structures, etc. change and develop. As such, firms should be aware that all new conflicts (whether real, potential, or perceived) must be reported to compliance for possible inclusion in Form CRS, Form ADV Part 2, or other relevant disclosure documents.
Monitoring For Updates
CRC recommends that firms adopt a process whereby trigger events for Form CRS updates are recognized, tracked, and implemented within Form CRS by compliance. Such process should also include identifying material updates and tracking and confirmation of related re-distributions of the Form to current retail investors, clients, and customers. Such trigger events could include updates and changes to offerings, fees, compensation structure, or any other content within Form CRS.
The Commission is not likely to give firms a break regarding Form CRS in 2022; in fact, CRC anticipates quite the opposite. We consider that 2021 was the honeymoon period for Regulation Best Interest, and even so, it brought 27+ enforcement actions related to Form CRS alone. Those actions, in conjunction with the most recent guidance and findings from the SEC should serve as both a warning and a road map as firms review and update their Form CRS.
Next Steps for Advisers and Broker-Dealers
As always, CRC believes that the most effective compliance program is a proactive one. Accordingly, CRC recommends that advisers take this opportunity to review existing Form CRS content, format, and any related practices, policies, and procedures to ensure they adhere to current rules, and evaluate and implement any process re-engineering that might be necessary to comply fully with both Regulation Best Interest and the Form CRS instructions.
To discuss the Form CRS, contact a regulatory specialist at CRC. Our team is available to assist with outsourced policy and procedure management, gap analysis, policy implementation, and training.