On December 17, 2021, the SEC’s Standards of Conduct Implementation Committee (Committee) released a statement that serves as a warning to Registered Investment Advisers (RIAs) and broker-dealers about their obligations pertaining to Form CRS relationship summaries. The Committee observed a number of Form CRS compliance deficiencies among RIAs. Among other deficiencies, some RIAs did not fulfill their Form CRS delivery obligations and/or failed to post it on the firm’s public website in a prominent place.
SEC rules require that RIAs deliver their relationship summaries to new and prospective retail clients, as well as to existing retail clients. The term “retail investor” is defined as a natural person, or a legal representative of a natural person, who seeks to receive or does receive services that are primarily for personal, family, or household purposes. Hedge funds, private equity funds, and venture capital funds do not fall within the definition of “natural person” for purposes of delivering Form CRS.
An RIA must also file its relationship summary with the SEC and post it on the firm’s public website. RIAs should use the Investment Adviser Registration Depository (IARD) to file their initial CRS, as well as any amendments.
Delivery issues identified by the Committee
RIAs must deliver the most recent Form CRS to each new retail investor prior to 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 they only have an oral contract with the client.
RIAs must deliver the most recent Form CRS to an existing client before or at the time the firm:
- Opens a new account that is different from the client’s existing one;
- Recommends that a retail investor roll over assets from a retirement account into a new or existing account or investment; or
- Recommends or provides a new advisory or brokerage service or investment that does not necessarily require the opening of a new account nor would it be held in an existing one.
This delivery requirement is applicable to the first-time purchase of a mutual fund, or an insurance product that is a security, that is not held directly within an account.
RIAs may deliver Form CRS to existing clients in a separate mailing or as part of the firm’s delivery of the annual Form ADV update, an account statement, or a periodic report. When delivered in a paper format, Form CRS must be the first of any documents delivered at that time. If Form CRS is delivered electronically, it must be displayed prominently in the electronic medium using a direct link or in the body of the message or email. Clients must be able to access the form easily. Form CRS is sometimes referred to as Form ADV Part 3.
Although there is no annual updating requirement for Form CRS, firms must update any information contained in it within 30 days if the form becomes materially inaccurate. The update must highlight the changes made. Firms must communicate any changes in the updated Form CRS to existing clients within 60 days. Firms must deliver Form CRS without charge to retail investors within 30 days upon request.
Make a post-it note to post latest Form CRS on the firm’s public website
RIAs are obligated to post their current Form CRS on their website in a prominent place and in a format that is easy to access. When an RIA posts Form CRS on its website, the firm must facilitate access to any of the information referenced assuming it is available online. Firms should provide hyperlinks to fee schedules, conflicts of interest disclosures, Form ADV Part 2A and other regulatory disclosures.
In its statement, the Committee reported that staff members were unable to find a relationship summary on the firm’s website or were forced to conduct an extensive search to locate it. Without easy access to a firm’s relationship summary, retail investors do not have a quick and easy way to obtain the information they need to evaluate and compare firms and financial professionals.
The staff observed several common issues that caused relationship summaries to be difficult to find such as:
- Utilizing small or hard-to-read text in the hyperlink to the relationship summary;
- Using a vague term or phrase, such as “regulatory disclosures,” as a caption for the relationship summary;
- Requiring multiple clicks from the RIA’s home page to access the relationship summary; and
- Burying the relationship summary among numerous other disclosures and documents.
It is important that RIAs document that clients received Form CRS. It is a best practice for RIAs to include a provision in their advisory agreements, so clients can acknowledge receipt of Form CRS.
In the first quarter of 2022, RIAs should update Form CRS to ensure that it adheres to all of the guidance set forth in the Committee’s statement, including all of the delivery requirements. In addition, RIAs should make certain that they have prominently posted the latest Form CRS on their public website. Firms’ policies and procedures should be reasonably designed to ensure that all delivery requirements are satisfied and that Form CRS complies with the guidance in the Committee’s statement. The statement can be found here.
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.