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
- policies and procedures regarding updating, and
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.
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