On July 26, 2021, the SEC announced that 21 Registered Investment Advisers (RIAs) settled charges alleging that they failed to file and deliver their client relationship summaries, known as Form CRS, in a timely manner. Form CRS is also frequently referred to as Form ADV Part 3. Six broker-dealers were also accused of not filing or delivering their client relationship summaries.
On June 5, 2019, the SEC adopted Form CRS and required SEC-registered investment advisers and SEC-registered broker-dealers to file their respective Forms CRS by June 20, 2020. Along with the filing and delivery requirements, firms were obligated to post their current Form CRS on their website in a prominent place.
According to the SEC’s orders, each of the firms missed those regulatory deadlines. The RIAs did not meet their filing requirements until being told to do so by the SEC’s Division of Examinations.
The firms agreed to be censured and to cease and desist from violating securities laws and regulations. They also agreed to pay civil penalties in various amounts. The SEC’s press release can be found HERE.
RIAs must familiarize themselves with their Form CRS obligations
Even before the SEC’s crackdown, there was evidence that RIAs were not adhering to the prescribed requirements. Form CRS provides information about the firm, which must be delivered to retail investors. Firms must also file their initial CRS, as well as any amendments, with the SEC using the Investment Adviser Registration Depository (IARD).
If firms have a website, they must also post the current version of Form CRS there. It must be posted prominently in a format that is easily accessible for retail investors. An RIA’s website may become false or misleading the firm fails to update the content promptly, or it posts an outdated version of Form CRS.
When RIAs post Form CRS on their website, firms must facilitate access to any information referenced in Form CRS, assuming the information is available online. They should provide hyperlinks to fee schedules, conflicts of interest disclosures, the RIA’s narrative brochure document(s) required by Form ADV Part 2A, or other regulatory disclosures.
RIAs must deliver Form CRS to each new retail investor before or at the time they enter into an investment advisory contract, as well as each time a new service is provided or a new account is opened for the client. RIAs must deliver Form CRS, even if their agreement with the retail investor is oral.
RIAs may deliver Form CRS to existing retail investors in a separate mailing or as part of the firm’s delivery of the annual Form ADV update, an account statement, or some other periodic report. If Form CRS is delivered in a paper format, it must be the first of any documents that are delivered at that time. If Form CRS is delivered electronically, it must be presented prominently in the electronic medium as a direct link or in the body of an email or message. It must be easy for retail investors to access.
RIAs must deliver the most recent Form CRS to a retail investor who is an existing client before or at the time the adviser:
- Opens a new account that is different from the retail investor’s existing account(s);
- Recommends that the retail investor roll over assets from a retirement account into a new or existing account or investment; or
- Recommends or provides a new brokerage or investment advisory service or investment that does not necessarily involve the opening of a new account and that would not be held in an existing account. This would include the first-time purchase of a mutual fund, or an insurance product that is a security, which is sold through a “check and application” process rather than being held directly within an account.
RIAs must deliver Form CRS to retail investors within 30 days after they request it.
Who is a retail investor?
A “retail investor” is defined as “a natural person or legal representative of such natural person, who seeks to receive or receives services primarily for personal, family, or household purposes.” All natural persons, regardless of net worth or sophistication, are included in the definition of “retail investor.” Therefore, the Form CRS requirements apply when retail investors seek retirement account services, such as IRAs, 401(k)s, and other tax-favored retirement plans.
Participants in 401(k)s and other work place retirement plans will not be viewed as retail investors for purposes of Form CRS when making certain ordinary plan elections that do not involve selecting or retaining an RIA to provide advisory services. Even if a financial professional or other firm representative assists a participant directly, such as at an enrollment meeting or through a call center interaction, the participant usually would not be making the type of account or firm choice contemplated by Form CRS.
Hedge funds, private equity funds, and venture capital funds are not a “natural person, or the legal representative of such natural person who seeks to receive or receives primarily for personal family or household purpose.” Therefore, firms are not obligated to deliver relationship summaries to those investment vehicles.
Form CRS deficiencies found by examiners
Before its enforcement actions on July 26, 2021, the SEC had warned RIAs about the importance of Form CRS compliance. In a Risk Alert published on April 7, 2020, the SEC stated that examiners would be focusing on whether:
- Form CRS was filed and delivered in a timely manner;
- Content in Form CRS was accurate and complete;
- Form CRS was formatted in accordance with the instructions and written in plain English;
- The firm implemented policies and procedures for updating Form CRS when necessary; and
- The RIA’s delivery records, as well as record-keeping policies and procedures, are compliant.
According to the Risk Alert, examiners may review a firm’s policies and procedures for updating the Form CRS in order to assess:
- How and whether a firm updates and files its Form CRS within 30 days after any information becomes materially inaccurate;
- How and whether a firm communicates these changes to retail investors within 60 days after the updates are required to be made; and
- What the firm’s process is for highlighting the most recent changes to retail investors.
RIAs must include an exhibit highlighting or summarizing material changes with any updates.
The Risk Alert can be viewed HERE.
The SEC’s sanctioning of the 21 RIAs sends a clear message that examiners will not tolerate Form CRS deficiencies. Although there is no annual updating requirement for Form CRS, RIAs must update any information contained therein within 30 days whenever the form becomes materially inaccurate. The filing must highlight the changes made. RIAs must communicate any changes in the updated Form CRS to retail investors who are existing clients within 60 days after the updates are required to be made and without charge.
RIAs should ensure that Form CRS is consistent with the firm’s other disclosures, policies and procedures, advisory agreements, websites, social media, and other advertising materials, as well as the firm’s actual practices. RIAs must also make sure all hyperlinks provided remain accurate and functional.
About RIA Compliance Group: RIA Compliance Group is an investment adviser compliance consulting firm based in Delray Beach, Florida. The firm’s mission is to provide affordable, timely, practical, and cost-effective compliance advice. We help investment advisers to comply with the myriad of state and SEC regulations and compliance obligations facing their firms. RIA Compliance Group takes pride in giving personal service and real world compliance advice, not theoretical concepts and legalese. The firm interacts on a daily basis with SEC and state securities regulators.
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