Before the holidays, the Securities and Exchange Commission issued a Staff Statement Regarding Form CRS Disclosures. It caught my attention because this was a weird form of letting the industry know that the SEC had concerns about practices. Then I noticed that the SEC had created a Standards of Conduct Implementation Committee and this statement was coming from the Committee. I poked around a bit to try to find who sits on the Committee, but haven’t had any luck yet.
Form CRS is the customer relationship summary required to be provided to retail clients of an investment adviser or broker-dealer. This was part of Regulation Best Interest that was adopted in June 2019 and required compliance by June 30, 2020. After a year and a half of use, the SEC is digging in deep and trying to make it work right.
The number one problem was that use of legalese and technical language in Form CRS. I’m sure most of these were written by lawyers or heavily edited by lawyers.
They Committee also found some hedging language stating that their relationship summary “does not create or modify any agreement, relationship or obligation” between the client and the firm. The rule doesn’t allow that.
One deficiency that particularly caught my eye was that some firms were using language from the proposed rule rather than the final rule. The Staff Statement highlight some particular language:
For example, many firms included the proposed conversation starters and/or proposed standard of conduct language (i.e., “We are held to a fiduciary standard that covers our entire investment advisory relationship with you.”) rather than the required language as adopted (i.e., “we have to act in your best interest and not put our interest ahead of yours”).
Regulation was a big change in disclosure for retail firms. I’m sure it is particularly hard for dually registered firms that have some of the more difficult conflicts to disclose. Everyone should expect that Form CRS will be a big focus for SEC examination for the foreseeable future.
Sources:
- Staff Statement Regarding Form CRS Disclosures (December 2021)
- Statement by the Staff Standards of Conduct Implementation Committee Regarding New Form CRS Disclosures (July 2020)
- Chart of Observations from Goodwin Procter
- Form CRS Adopting Release
- Small Entity Compliance Guide
- Frequently Asked Questions on Form CRS
- SEC Spotlight page on Regulation Best Interest, Form CRS and Related Interpretations