Tag: Form CRS

The SEC Is Not Happy with Form CRS Disclosures

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:

SEC Reaction to Form CRS

Registered Investment Advisers had a June 30th deadline for delivery of the new Form CRS to their clients. The forms also need to be filed with the SEC. If you thought the SEC would not look at them, you were wrong.

The SEC’s new Standards of Conduct Implementation Committee has been reviewing the Form CRS submissions to assess compliance with the format and standard requirements of the Form CRS regulations.

It sounds like the Committee is not happy with what it’s seen so far.

The relationship summaries reviewed to date generally reflect effort by firms to meet the content and format requirements of Form CRS….

That sounds like they’re giving out a participation trophy to a lot of firms. A comforting coach thanking players for coming out even though they lost.

Not all are mediocre or bad. The Committee found some good examples with simple, clear disclosure. It intends to find ways to share best practices and feedback. There should be a roundtable in the fall for the Committee’s staff to share ideas.

As for private fund managers, funds are not considered natural persons who would be retail investors under the Form CRS regulation.

Sources:

Form CRS for Private Fund Managers

As part of Regulation BI package of regulatory changes, the Securities and Exchange Commission created a new Form CRS that needs to be delivered to “retail investors.” Of course there are questions from the industry. The SEC’s Division of Investment Management and Division of Trading and Markets created a website that answers Frequently Asked Questions on Form CRS. The question for pooled funds whether whether the rule would look through to retail investors in a fund.

Pursuant to new rules adopted by the SEC under the Securities Exchange Act of 1934 and the 1940 Act in connection with Regulation BI, registered broker-dealers and registered investment advisers will be required to deliver a relationship summary to retail investors. This summary is Form CRS.

Form CRS will require a firm to provide information about the relationships and services the firm offers to retail investors, fees and costs that retail investors will pay, specified conflicts of interest and standards of conduct, and disciplinary history.

One FAQ addresses a question I had regarding pooled funds:

Q: My firm is an investment adviser to pooled investment vehicles, such as a hedge funds, private equity funds and venture capital funds.  The investors in these funds include natural persons who may be “retail investors” as defined in Form CRS. Am I required to deliver a relationship summary to these funds?

A:  An investment adviser must initially deliver a relationship summary to each retail investor before or at the time the adviser enters into an investment advisory contract with the retail investor.  “Retail investor” is defined as “a natural person, or the legal representative of such natural person, who seeks to receive or receives services primarily for personal, family or household purposes.” In the staff’s view, the types of pooled investment vehicles described above would not meet this definition and a relationship summary would not be required to be delivered.

So, the manager doesn’t have to deliver a Form CRS to the fund itself. It’s less clear if you have to deliver it to the “retail investors” in the fund. Does Rule 206(4)-8 pass the Form CRS requirement through the pooled investment vehicle?

Sources: