SEC Examination Guidelines and FAQs on Form CRS

The SEC has issued guidance addressing the Form CRS. The first is a Risk Alert from the Office of Compliance Inspections and Examinations (OCIE) indicating that OCIE will be looking for good faith compliance when it conducts examinations after the June 30, 2020 Form CRS compliance date. The second includes additional FAQs providing clarification on delivery and filing requirements along with several other topical areas. We discuss the examination guidance and the FAQs in more detail in an alert on our website for those looking for more in-depth analysis. Also, note that the CRS Risk Alert was issued concurrently with a similar Alert on Reg BI examinations in general, which is the subject of a separate post on this site.

As SEC Chairman Clayton previously indicated, the compliance date of Form CRS will not be extended, but the “initial” examinations will focus on whether firms made “a good faith effort to implement Form CRS.” While emphasizing that the Risk Alert is not intended to serve as an explanation of Form CRS requirements, OCIE explains that its initial examinations may include assessment of compliance with the following areas:

  • delivery and filing
  • relationship summary content
  • formatting
  • policies and procedures regarding updating, and
  • recordkeeping

Based on the detailed discussion in the Risk Alert of the first two items, it appears OCIE may devote more resources to examining these areas.

On delivery and filing, OCIE says it may (1) review whether the firm has filed its relationship summary, including any amendments, and whether the summary is posted on the firm’s public website, if any; (2) evaluate the process for delivering the relationship summary to existing and new retail investors; and (3) review policies and procedures on the required relationship summary delivery processes and dates.

The first three FAQs also provide details on the filing requirements, explaining first that firms may begin filing their Forms CRS immediately. The FAQs also provide specific instructions on where RIAs, broker-dealers and dual registrants must file their relationship summaries, and indicates that affiliated firms providing a combined relationship summary will each be required to file the combined summary.

Regarding customer delivery, the Risk Alert distinguishes between existing and new retail investors. For existing investors, the Form CRS must be delivered by July 30, 2020, and before or at the time of opening a new account, recommending a rollover of assets from a retirement account into a new or existing account or investment, or recommending a new brokerage or investment advisory service or investment. For new retail investors, OCIE says the relationship summary must be delivered before or at the earliest of entering into an investment advisory contract, making a recommendation of an account type, securities transaction, or investment strategy, placing an order for the investor, or opening a brokerage account.

The fourth FAQ also discusses the furnishing of Form CRS to retail customers. The Staff indicates that the relationship summary may be provided before the June compliance date, but the firm should also post it on its public website, comply with the updating and related delivery requirements and file the relationship summary with the SEC (as required by the Form CRS Instructions). The FAQ cautions dual registrants, whose summaries address both advisory and brokerage business, that the disclosures, including in particular those relating to standards of conduct, must be true as of the time they are made.

Not surprisingly, the Risk Alert also indicates that OCIE will examine for completeness of the information, accuracy and the absence of misleading information and goes into some detail on the areas that an examination may cover. These include, for example, statements regarding account monitoring and investment authority, fees and costs descriptions, compensation of financial professionals, including cash and non-cash compensation, how conflicts of interest and legal or disciplinary history are described.

The formatting and recordkeeping guidance in the Risk Alert are succinct: firms need to comply with the formatting instructions and the firm’s policies and procedures must comply applicable delivery requirements.

The last guidance regarding relationship summary updates and the related policies and procedures provides more detailed guidance than the sparse guidance for the above two areas. This guidance in the Risk Alert indicates that OCIE may assess timely updating of the summary, timely communication to customers and the process used to highlight changes.

OCIE says it is providing this “transparency into its plans regarding Form CRS examinations to empower firms to assess their level of preparedness as the compliance date nears.” We advise firms to examine both the Risk Alert and the FAQs and their own Form CRS documents and implementation processes for reasonable compliance with the SEC’s guidance.

The material contained in this communication is informational, general in nature and does not constitute legal advice. The material contained in this communication should not be relied upon or used without consulting a lawyer to consider your specific circumstances. This communication was published on the date specified and may not include any changes in the topics, laws, rules or regulations covered. Receipt of this communication does not establish an attorney-client relationship. In some jurisdictions, this communication may be considered attorney advertising.

About the Author: James G. Lundy

James G. Lundy represents clients in Securities and Exchange Commission (SEC), Commodities Futures Trading Commission (CFTC), self-regulatory organization, and other financial regulatory agency investigations and examinations, and compliance and governance counseling, white collar criminal investigations, and complex business litigation. With 12 years of senior SEC experience and more than two years of in-house experience at a futures and securities brokerage firm, Jim has developed an in-depth working knowledge of the various regulatory bodies with enforcement, examination, and policy oversight of the securities and futures industries.

About the Author: Sandra D. Grannum

Sandra Dawn Grannum concentrates her practice on securities, broker/dealer arbitration, litigation, mediation and regulatory defense. She is co-chair of the Commercial Litigation Team.

Sandy has tried complex multimillion-dollar arbitrations before FINRA, AAA and JAMS across the country. She has represented brokerage firms, banks, clearing firms, and associated persons in over 60 arbitrations before the NASD and FINRA which have been tried through award. In addition, she has successfully pursued cases in state and federal courts and in adversarial proceedings before bankruptcy courts.

About the Author: Joshua Waldbeser

Joshua J. Waldbeser counsels plan sponsors and committees with respect to their fiduciary responsibilities under ERISA, as well as design and operational considerations for 401(k) plans, ESOPs and other defined contribution plans, cash balance and traditional defined benefit plans, and deferred compensation arrangements of all types. Josh also works extensively with insurance companies, investment advisors and funds, banks and trust companies, broker-dealers, record keepers, TPAs and other service providers with respect to ERISA, tax, securities and other compliance matters, including investment and fiduciary issues, as well as prohibited transactions and exemptions.

About the Author: David W. Porteous

David Porteous routinely counsels clients in the investment management, broker-dealer and financial services industries on regulatory matters including examinations, investigations and enforcement proceedings as well as complex civil and securities-related litigation. In addition, he assists clients in developing and implementing compliance and regulatory risk management plans and represents clients in complex civil and securities litigation.

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Joshua Deringer has developed a strong client following for his skill in expanding liquid investment options and implementing innovative structures for private and alternative investment funds. His forward-thinking counsel has made Josh a sought-after attorney for national and international financial services companies involved in all aspects of the investment management industry. Josh leads the firm's investment management practice group.

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Fred Reish represents clients in fiduciary issues, prohibited transactions, tax-qualification and Department of Labor, Securities and Exchange Commission and FINRA examinations of retirement plans and IRA issues.

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