The Securities and Exchange Commission (SEC) settled charges with 21 investment advisors and six brokers, claiming the firms had missed regulatory deadlines and failed to “timely file and deliver” their Form Customer Relationship Summaries (CRS) to investors.
Form CRS was adopted in June 2019 and implemented one year ago in tandem with the SEC’s Regulation Best Interest rule. The form was intended to provide brokerage and advisory clients with a streamlined summary of the relationship between a customer and advisor with accessible “plain English” language and disclosures, detailing a firm’s fees, products, commitments and clients.
Firms were required to file their Form CRS with the SEC, and also deliver them to potential and new investors by June 30, 2020. Delivery to existing retail clients was to follow by one month later. If firms had a website, they were also required to post the form on it, according to the SEC.
According to the SEC’s order, none of the firms that were charged had filed or delivered their Forms CRS, or posted it on their websites, until they were reminded twice of the missed deadlines through their regulators—the SEC’s Division of Examinations for investment advisers and the Financial Industry Regulatory Authority (FINRA) for broker/dealers.
The SEC said the investment advisers violated Section 204 of the Investment Advisers Act of 1940 and Advisers Act Rules 204-1 and 204-5, and the B/Ds violated Section 17(a)(1) of the Securities Exchange Act of 1934 and Exchange Act Rule 17a-14. Without admitting or denying the findings, the firms agreed to be censured, to cease and desist from violating the charged provisions, and to pay civil penalties.
The case was announced on the first day in office for new SEC enforcement director Gurbir S. Grewal. He said, “Registration with the SEC as an investment adviser or broker-dealer comes with mandated filing and disclosure obligations. Today’s cases reinforce the importance of meeting those obligations and providing retail investors with information that is intended to help them understand their relationships with their securities industry professionals.”
SEC Enforcement Division’s Asset Management Unit co-chief Adam S. Aderton said, “Form CRS is intended to provide retail investors with a brief summary about the services a firm offers, its fees, conflicts of interest and other information that can help investors make more informed choices. By failing to file, deliver, and post this form, these firms deprived their clients and customers of the benefits of that information.”
The SEC has been finding compliance shortcomings related to Form CRS. Last October, the agency warned firms not to omit disciplinary history from the document. Last July, the agency said it was finding Form CRS form and content problems.
In its “2021 Examination Priorities” report, the SEC noted it has “identified and notified hundreds of firms that they had failed to timely file a Form CRS.”
The agency observed firms are using a “wide variety of approaches” to comply with the Form CRS requirements. “Many firms appeared to make effective use of hyperlinks in their digital Form CRSs,” the SEC stated. “We also observed that many firms are generally avoiding legalese and generic boilerplate language, but we also noted the readability of some Form CRSs could still be improved.”
Chief compliance officers and firms seeking additional guidance should review the SEC’s two related risk alerts issued in April 2020—“Examinations that Focus on Compliance with Regulation Best Interest” and “Examinations that Focus on Compliance with Form CRS”—that identify key areas of SEC scrutiny. Additionally, agency staff in December 2020 issued a statement identifying components of Reg BI that it said “may be the subject of focus in the next phase of examinations, including how firms have considered costs in making a recommendation and the processes firm personnel have used to recommend complex products.”
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