RIA Compliance Blog
In a recent enforcement action that is significant to broker-dealers and investment advisers alike, FINRA continues to emphasize the importance of making full and accurate disclosures in customer relationship summaries (Forms CRS) and of following the Form’s instructions.
Last month, FINRA settled a case with J.K. Financial regarding Form CRS disclosures. The California based, SEC-registered broker-dealer agreed to FINRA’s settlement without admitting or denying its allegations.
Also known to investment advisers as Form ADV Part 3, Form CRS is a brief introduction to the broker-dealer or investment adviser, providing retail clients with highlights and conversation starters regarding the adviser. A key conversation starter is Item 4’s “Do you or your financial professionals have legal or disciplinary history?” Form CRS’s instructions require advisers to respond “Yes” if the firm or any of its financial professionals are required to disclose disciplinary history on any regulatory disclosure forms.
In 2022, the SEC fined J.K. Financial $10,000 and found that the firm had willfully violated § 17(a)(1) of the Securities Exchange Act of 1934 and Exchange Act Rule 17a-14 regarding its failure to file or distribute a Form CRS. There, the SEC found that J.K. Financial had not filed its initial Form CRS in time for the June 30, 2020, deadline, delaying until October 5, 2020. The Commission then found that J.K. Financial’s Form CRS lacked required language and was not delivered to its clients until January 2022, when the firm corrected its Form CRS and delivered the form to its clients.
Three years later, J.K. Financial found itself under further scrutiny regarding its CRS – this time from FINRA, for not responding “Yes” to the question regarding disciplinary history. FINRA found that J.K. Financial failed to respond “Yes” from June 2024 to April 2025, despite the requirement by Form CRS’ instructions.
FINRA also found that required conversation starters regarding fees and costs and conflicts of interest were omitted from J.K. Financial’s Form CRS altogether until April 2025. The Form CRS instructions also require firms to direct clients to investor.gov/CRS for a “free and simple search tool” to search the adviser and its representatives, which J.K. Financial omitted.
Beyond the importance of full and accurate disclosure in Form CRS, J.K. Financial serves as a reminder to thoroughly rectify any deficiencies found by the SEC or FINRA, as those deficiencies serve as points of scrutiny in following examinations.
FINRA found that J.K. Financial had three other violations in addition to its Form CRS. First, FINRA found that the firm’s written supervisory procedures (WSPs) did not specify who was responsible for archiving emails and did not specify the review process for such email reviews. FINRA subsequently found J.K. Financial to have violated § 17(a) of the Exchange Act, Exchange Act Rule 17a-4 and FINRA Rules 3110, 4511, and 2010.
Second, FINRA found that J.K. Financial had two instances of violative conduct around the supervision of outside business activities (OBAs), failing to adopt or enforce a system to properly supervise representatives’ OBAs. FINRA found that J.K. Financial (1) failed to require documentation of the firm’s consideration of necessary factors and (2) failed to actually document said consideration on multiple occasions. FINRA therefore found J.K. Financial to have violated FINRA Rules 3110, 3270.01, and 2010.
Finally, FINRA found that J.K. Financial failed to adopt sufficient WSPs regarding client investment profile information, per Regulation BI’s Care Obligation. FINRA found (1) that J.K. Financial’s new account forms did not sufficiently collect information on customer risk tolerance, liquidity needs, or time horizons, (2) that clients only investing in mutual funds did not receive the new account forms and relied on the forms required by the investment company, (3) that the firm had no supplementary tools besides the new account forms to collect customer profile information, and (4) that J.K. Financial had no requirement or procedure for documenting investment profile information received from clients orally. FINRA subsequently found J.K. Financial to have violated § 17(a)(1) of the Exchange Act, Exchange Act Rules 151-1(a)(1) and 17a-3, and FINRA Rules 3110, 4511, and 2010.
For the found violations, FINRA censured J.K. Financial, fined the firm $65,000, and required it to certify that it had fixed the identified deficiencies.
Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds, and issuers of securities, among others. Our regulatory practice group assists financial service providers with complex issues that arise in the course of their business, including compliance with federal and state laws and rules. Please visit our website for more information.