On Friday, June 26, the U.S. Securities and Exchange Commission (“SEC”) released updated responses to FAQs regarding Form CRS. Notwithstanding the timing of the updated FAQs, the additional guidance offers supplementary and expanded information regarding the SEC’s stance on important considerations for the Form CRS including:
- Whether investment advisers and broker-dealers with no retail investors are required to file and deliver Form CRS;
- The use of specific language prescribed by the Form CRS instructions;
- Delivery requirements for financial professionals registered with unaffiliated investment advisers and broker-dealers;
- Delivery requirements for certain investment services, products, and activities by investment advisers, broker-dealers, and underwriters; and,
- Delivery format and record-keeping requirements for Firms required to file and deliver Form CRS.
The Updated Form CRS FAQs
The SEC’s updated FAQs provide additional clarifying information regarding the SEC’s interpretation of requirements set forth under the Form CRS instructions. While the timing of the release in proximity to the June 30 deadline for filing the Form CRS might have rankled the feathers of some Firms, the updated FAQs do provide a clearer understanding with respect to some key points for Firms required to file and deliver the Form CRS to retail investors. As such, here is a summary of the updated guidance:
No Retail Investors
The SEC has now clarified that investment advisers and broker-dealers that do not have any retail investors are not required to file and deliver the Form CRS. Per the Form CRS Instructions, a retail investor is defined as “a natural person, or the legal representative of such natural person, who seeks to receive or receives services primarily for personal, family or household purposes.”
The Use of Specific Wording
While the SEC requires that Firms use specific wording prescribed by the instructions in their Form CRS, there are limited circumstances in which Firms can now alter or exclude certain verbiage should the language prescribed by the instructions be inaccurate with respect to the Firm’s business. Despite these few exceptions, the SEC maintains that Firms should ensure their language follows the prescribed language in the instructions in light of the fact that the Form CRS should be seen as a disclosure document rather than marketing collateral.
Financial Professionals and Unaffiliated Investment Advisers and Broker-Dealers
If a financial professional is registered with both an investment adviser and a broker-dealer that are unaffiliated, the SEC maintains that the Form CRS for both firms should be delivered by the financial professional in their capacity as both an investment adviser representative and registered representative of both firms. The SEC does caution that both firms should review their respective delivery requirements for the Form CRS and their retail investors.
Conversion from an Investment Advisory Account to a Brokerage Account
Should a retail investor decide to convert an investment advisory account to a brokerage account, this would trigger the delivery of the Form CRS to the retail investor per the SEC’s interpretation of the instructions.
New Brokerage and Investment Advisory Services and Products
In the SEC’s view the introduction of certain types of products and services that did not already exist in a retail investor’s account would require delivery of the Form CRS. For example, if an account enabled margin or options features, this would constitute a new service that was not previously offered. Additionally, if a private fund or other investment product was offered outside of the retail investor’s account, this would also trigger delivery of the Form CRS; however, if a retail investor’s account activates certain features, such as check-writing capabilities, which do not relate to investment options, the delivery requirement would not be triggered.
30-Days or Less
The SEC has clarified that they will not require firms to redeliver a Form CRS if a delivery requirement was triggered under the Instructions but the Firm had already delivered the Form CRS to retail investors less than 30-days prior; however, Firms have been admonished to adhere to the delivery requirements laid out in the Instructions and to provide a copy of the Form CRS to retail investors within 30-days upon request.
Qualified Custodian Introductions
Per the SEC’s view, if a broker-dealer merely facilitates the opening of a brokerage account, introduces a retail investor to a qualified custodian or clearing or carrying broker-dealer, or transmits buy or sell orders for a retail investor in conjunction with services provided by an investment adviser, then the broker-dealer would not be required to file, deliver, or store the Form CRS in conjunction with those services; however, depending on facts and circumstances, if the broker-dealer acts in a different capacity with a retail investor then they may be required to file, deliver, and store the Form CRS per the instructions.
Underwriters and Abandoned Accounts
With regards to abandoned accounts and those broker-dealers that only act as underwriters to mutual funds and variable annuities, the SEC maintains that if a retail investor’s abandoned or orphaned account is returned to the underwriter, this would not trigger the Form CRS requirements; however, depending on facts and circumstances, if the broker-dealer acts in a different capacity with the retail investor then they may be required to file, deliver, and store the Form CRS per the instructions.
Cover Sheets and Wrap Sponsors’ Form CRSs
Per the SEC’s Form CRS FAQs, Wrap Sponsors are permitted to provide a cover sheet explaining why they are providing the Form CRS for multiple investment advisers that manage different strategies or portfolios for the wrap fee program. If the Firm delivers the Form CRSs in paper format, the Firm can provide the cover sheet on top or if by email, it can be provided in such a way that it will not conceal the information in all of the Form CRSs being delivered.
Recordkeeping
The SEC has stated unequivocally that broker-dealers and investment advisers must maintain books and records of when their Form CRS was delivered to a retail investor as well as maintain copies of each revised and updated Form CRS.
Read the updated FAQs here.
What Should I Consider When Reviewing the Updated FAQs?
Firms should begin by reviewing the updated FAQs to ensure that they are familiar and in compliance with the SEC’s updated guidance. Firms should: (1) evaluate their policies and procedures and determine what enhancements might be needed with respect to their Form CRS policies and procedures; (2) ensure that the activities of the Firm and its representatives are being monitored in order to determine when and how delivery requirements are triggered; (3) confirm that both deliveries and requests for copies of Form CRS are being tracked and maintained as part of the Firm’s books and records; and, (4) make sure that the Firm’s investment adviser representatives and/or registered representatives have received adequate training on when they are required to deliver the Form CRS to retail investors.
Jacko Law Group can help your firm with reviewing the SEC’s updated guidance and determining if additional policies and procedures need to be drafted and/or existing policies and procedures need to be revised to ensure compliance with the Form CRS FAQs, how to address any possible violations of the Form CRS instructions, and assist with training your employees to keep them up-to-speed on Form CRS delivery requirements. Our team of attorneys will use our extensive experience to ask detailed questions designed to assist your firm with determining and ensuring that adequate controls are in place to remain compliant.