By: Cory Roberson, Principal of FIN Compliance
April 18, 2019. Anticipation is rising, as we reach the one-year anniversary since the SEC’s proposed client relationship summary requirement (“Form CRS”) that would serve as a ‘Part 3’ extension of the Form ADV. Ultimately, if passed, application of this rule will apply to SEC-registrants, and then likely, onto state advisors during a transition period. For now, the application date is unknown.
Update: applies by 6/30/2020 for SEC-Registrants
Update: applies by 6/30/2020 for SEC-Registrants
General Overview
The Customer Relationship Summary (CRS) will function as an extension of the brochure disclosures and reporting requirements on the existing ADV Part 2 document. Based on the initial proposal, the Form CRS will provide clients with a short, concise, and accurate summary of:
their relationship with the firm;
their advisors’ standards of conduct;
the services that they receive;
fees and costs associated with these services;
any specified conflicts of interest; and
whether their advisor or its associates are subject to any legal or disciplinary action.
Filings: https://www.sec.gov/info/smallbus/secg/form-crs-relationship-summary
Filings: https://www.sec.gov/info/smallbus/secg/form-crs-relationship-summary
Form CRS Decoded in Six Areas that include:
Filing Requirements;
Delivery Requirements;
Electronic Posting and the Manner of Delivery;
Preserving Records;
A Narrative that must be in Plain English Language; and
Full and Truthful Disclosures.
#1 – Filing Requirements for Broker-Dealers & Investment Advisors
Initial firm filing instructions will include the following:
Investment Advisors and Broker-Dealers must deliver a CRS to their retail investor clients, even if their agreement with the client is made verbally.
Investment Advisers must submit a CRS as part of their required annual ADV amendments via an IARD filing.
Broker-Dealers must electronically file the Form CRS in a text-searchable format via an EDGAR filing.
Dual Investment Advisor and Broker-Dealers (Hybrid firms) must complete only one Form CRS and submit via IARD and EDGAR filing.
Note: It’s not required to prepare a CRS if you do not have any retail investors to whom you are required to deliver a relationship summary.
#2 – Delivery Requirements to Clients
New Clients
The SEC proposal states the following requirements for delivery of the CRS:
Registered Investment Advisors must deliver the CRS before, or at the time a new relationship begins.
Broker-Dealers must deliver the CRS before, or at the time the investor first engages the firm’s services.
Dual Investment Advisor and Broker-Dealers (Hybrid firms) must deliver the CRS before, or at the time of entering into an advisory agreement with the investor to engage the firm’s services.
Existing Client accounts
Investment Advisors and Broker-Dealers will need to deliver a copy of the CRS to all existing retail investor clients within 30 days of filing the new document.
#3 - When Must Investors receive a new CRS copy
Existing retail investors must receive a new CRS each time when:
Opening a new account that is different from the retail investor's existing account(s);
A client material change that affects the nature and scope of the relationship. Note: The extent to which a change would require the relationship summary depends on the specific circumstances and facts; and/or
The retail investor requests a copy of the CRS; the RIA or BD must deliver it within 30 days of the request.
Material Changes: The Investment Advisor or Broker-Dealer must update the CRS within 30 days and communicate any changes within that period.
#4 - Electronic Posting and the Manner of Delivery.
Advisors Must Post on Public Website(s)
If the Investment Advisor or Broker-Dealer has a public website, then the CRS must be published in a common place and in an accessible format. If advisors do not have a website, then a toll-free number must be provided for the retail investor to request a copy of the CRS.
Email Delivery is ok
A CRS summary can be sent electronically, including updates, consistent with SEC guidelines. The use of electronic media by brokers, transfer agents and investment advisors for information delivery can be found here: www.sec.gov/rules/concept/33-7288.txt
Paper Version is ok
If advisors submit the relationship summary on paper, and not as a standalone document, they should make sure that it is the first of all documents submitted at that time.
#5 - Preserving Records.
Investment Advisors and Broker-Dealers must maintain copies of each version of the CRS provided to retail investors. Also, the documents must remain available to the SEC staff upon request. Ref. Advisers Act rule 204- 2(a)(14)(i); the Exchange Act rule 17a-4, and similar state rules.
#6 - Narrative Instructions
Content Guidelines
CRS should include specific information and, in some cases, specific wording.
Additional disclosures are prohibited in the relationship summary, except for those provided in the Instructions provided by the SEC and within the Form ADV.
In the brokerage services section, include the heading "Broker-Dealer Services" and the subheading "Brokerage Accounts."
In the investment advisory column, include the heading "Investment Advisor Services" and the subheading "Advisory Accounts."
Tips for Writing CRS in Plain Language.
Consider the retail investors’ level of financial experience.
Use short sentences;
Avoid double negatives.
Use definite, concrete, everyday words
Avoid legal jargon or complex technical business terms unless you explain them first.
Use active voice —You must write as if you are speaking to the retail investor, using “you,” “us,” “our firm,” etc.
Full and Truthful Disclosures.
The CRS must comprise of complete and accurate information only. Advisors must not omit any material facts necessary to comprehend its disclosure documents. Follow the same rules as the existing disclosure requirements. If a statement is inapplicable or misleading, advisors may omit or change that statement. Note: Filing CRS is an extension and does not alone, necessarily, fulfill your existing disclosure requirements.
Graphical Format
Whether in electronic or paper format, the CRS must not exceed four 8½” x 11” pages if converted to PDF format, using at least an 11-point font size and a minimum 0.75” margins on all sides.
To explain the required information you can use diagrams, graphs, tableaux, and other graphics or text features, as long as it:
Meets and is responsive to the requirements in these instructions (including space limitations);
Is accurate and not misleading; and/or
Does not obscure or impede CRS comprehension. You may also include instructions on their use and interpretation.
Use Hyperlinks if posted on website
If posted online, for instance on your firm’s website, any document that is cross-referenced must be hyperlinked.
Advisors may embed hyperlinks to required disclosures, such as, links to fee schedules, conflicts disclosures, the required narrative brochure, or other regulatory disclosures.
If you are a dual registrant, items 2 through 4 and item 6 must compare side-by-side advisory services and brokerage services in a tabular format. Item 5 must only be completed by stand-alone investment advisors and stand-alone broker dealers.
More information on Form CRS is available for customers of FIN Compliance.
Compliance and Business Management
FIN Compliance (FINCompliance.io) is a consortium of compliance services including: RIA Consults-Roberson Consults Group, a compliance consulting firm, RIA Review, a compliance-management software tool (SaaS), B-D Review, a RIA/Broker-Dealer compliance management software tool, and FINLancer is a business management portal featuring: E-signature tools; Invoicing integration, Vendor Directory, continuity directory*, business client document portal, and more (available by Q3 2019). Access all services on one site: FINCompliance.io.
Impact
FIN Missions (FINmissions.com) provides business support group sessions for other entrepreneurs. In addition, Cory has volunteered for more than fifteen youth programs in locations such as like S. Korea, China, S. Africa, Thailand, and India.
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