If Registered Investment Advisers (RIAs) and broker-dealers have not gotten the message about the importance of meeting their Form CRS obligations, the SEC has sent another shot across the bow. On February 15, 2022, the SEC announced that six RIAs and six broker-dealers agreed to settle charges that they failed to file their Form CRS relationship summaries and deliver them by the regulatory deadline. In certain cases, these firms failed to include all of the necessary information needed to satisfy Form CRS requirements.
The purpose of Form CRS is to ensure that retail investors understand their relationships with securities industry professionals. The SEC has now imposed sanctions on forty-two financial firms for failing to satisfy these obligations, which are designed to help retail investors understand their relationships with the securities industry professionals they engage.
In a press release issued in conjunction with these twelve enforcement actions, the Deputy Director of the SEC’s Enforcement Division urged firms that are delinquent in fulfilling their Form CRS obligations to complete their compliance requirements and self-report to the SEC. The SEC’s press release is available here.
The SEC found that the six RIAs violated Section 204 of the Investment Advisers Act of 1940 and Rules 204-1 and 204-5 thereunder. The broker-dealers violated Section 17(a)(1) of the Securities Exchange Act of 1934, as well as Exchange Act Rule 17a-14. Each of the firms agreed:
- To be censured;
- To cease and desist from violating the Form CRS requirements; and
- To pay civil penalties.
The SEC imposed civil penalties ranging from $10,000 to $97,500.
Prior SEC warnings reinforce the seriousness of Form CRS compliance
These stiff penalties are not surprising in view of the SEC’s previous sanctions of firms that failed to comply with the Form CRS requirements. On July 26, 2021, the SEC announced settlements with twenty-seven other financial firms that failed to file and deliver their Forms CRS to their retail investors in a timely manner. In addition, the SEC separately settled three other enforcement actions involving Form CRS deficiencies.
The twelve enforcement actions announced on February 15, 2022, follow on the heels of a statement published by the SEC’s Standards of Conduct Implementation Committee (Committee) on December 17, 2021. In that statement, the Committee warned RIAs and broker-dealers about their obligations pertaining to Form CRS relationship summaries. Among other deficiencies identified by the Committee, some RIAs did not deliver Form CRS within the required timeframe and/or failed to post it on the firm’s public website in a prominent place.
A firm’s policies and procedures should be reasonably designed to ensure that all delivery obligations are satisfied and Form CRS complies with the requirements articulated in the Committee’s statement. The statement is available here.
Enforcement actions make it abundantly clear that the SEC takes Form CRS compliance requirements very seriously. Firms must 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 are not viewed as a “natural person” for purposes of delivering Form CRS. The form must be posted on a firm’s public website in a prominent spot.
Each of the firms sanctioned on February 15, 2022, missed the Form CRS regulatory deadlines. In addition, certain firms failed to include information and language that is specifically required for use on Form CRS.
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.