Don't overpay for Form CRS assistance. The SEC wants you to ditch the legal or highly technical jargon and write plainly to your client.
On June 5, 2019, the SEC adopted Regulation Best Interest (Reg BI) requiring investment advisers and broker-dealers with retail clients to add a Part 3, Client Relationship Summary, to their Form ADV (also known as Form CRS). For the purposes of the requirement, the concept of a “retail” client relates to someone who is a natural person (or the legal representative of a natural person) who receives services primarily for personal, family or household purposes. This concept of a “retail” client does not distinguish based on net worth. Starting May 1, 2020 with a hard deadline of June 30, 2020, firms must update their ADV as either (i) an other-than-annual amendment or (ii) part of an initial application or annual updating amendment. If you’re wondering how this additional disclosure document differs from the Form ADV Part 2A, great question! The hope is this form will clarify to retail clients the differences between an investment adviser and broker dealer – something that is not necessarily abundantly clear in the Part 2A, nor is it a focal point.
Now, before everyone starts scrambling to draft their Client Relationship Summary, it’s important to note that thus far no states have adopted this disclosure document. So, for those state-registered investment advisers who are not dually registered broker-dealers/reps, you can breathe a sigh of relief. This is one additional compliance obligation you have dodged…for now!
Limited to no more than two pages, the SEC is looking to avoid the perils of over-disclosure by forcing firms to keep it short and sweet. Arguably one of the most design minded disclosure documents required by the SEC, examiners will be judging you on the use of white space and other features to make this relationship summary easy to read. In addition, they’ve indicated that firms should (i) use short sentences and paragraphs; (ii) use definite, concrete, everyday words; (iii) use active voice; (iv) avoid legal jargon or highly technical business terms unless you clearly explain them; and (v) avoid multiple negatives. Within your two pages, be prepared to cover these five items:
Relationship and Services
Fees, Costs, Conflicts, and Standard of Conduct
Items 2 and 3 represent the chunkiest sections and will likely present a challenge for many firms to remain succinct. As a number of the required disclosures in Item 3 reference or mirror sections of the Form ADV Part 2A, it is important to ensure that language in both documents are consistent with one another. To help alleviate wordiness in the Form CRS, the SEC is also allowing the use of hyperlinks, mouse-over windows, or any other way to provide cross reference materials to retail clients of the less abbreviated versions of the disclosure language. As you fill out the form, keep the SEC’s full Form CRS instructions handy and perhaps a reference to their most recent FAQs as well.
On a go forward basis, investment advisers will be expected to deliver the Form CRS before or at the same time they enter into an advisory contract (written or oral) with a retail client and before or at the time they recommend an account type. Meanwhile, broker-dealers must deliver the disclosure document before or at the earliest of (i) recommending an account type, securities transaction, or an investment strategy involving securities; (ii) placing an order for the investor, or (iii) opening a brokerage account for the client. With not a lot of space to cover some weighty topics, it will be interesting to see if this relationship summary becomes yet another glossed over document in the pile of paperwork “reviewed” by clients or the key to helping investors differentiate between investment advisers and broker dealers.