RIA Compliance Blog
The SEC’s Divisions of Investment Management and Trading & Markets have issued guidance in the form of a set of Frequently Asked Questions (or “FAQs”) addressing the upcoming implementation of the newly-created SEC Form CRS Relationship Summary (“Form CRS”).
As previously profiled on this blog, Form CRS is a new SEC disclosure document that will be applicable to both RIAs and broker/dealers offering services to retail investors. Indeed, for RIAs, the new Form CRS will function as a new Part 3 to the RIA’s existing Form ADV. The purpose of Form CRS is to summarize basic information about the firm’s services, fees, and costs, as well as its conflicts of interest and material disciplinary events. As noted, Form CRS obligations only arise for firms dealing with “retail investors,” which the SEC defines as “natural persons” or their legal representatives, who seek to receive or receive services “primarily for personal, family or household purposes.” Full implementation of Form CRS is slated for June 30, 2020.
Notably, these FAQs are the Commission’s first offering of guidance since its June 5, 2019 release of the new rules codifying both Form CRS and the new Regulation Best Interest (or “Reg BI”) applicable to broker/dealers. While this iteration only includes four individual FAQs, the SEC notes that it expects to post responses to additional questions from time to time.
The four FAQs break down into two categories (with two FAQs each), one dealing with the formatting of Form CRS and the other dealing with the Form’s delivery requirements. The first FAQ in the formatting category relates to a potential quandary faced by firms offering multiple and disparate services to retail investors—namely, can such a firm prepare multiple Forms CRS? The SEC’s answer to this question is a resounding “no.” Specifically, firms “must only prepare one relationship summary summarizing all of the principal relationships and services it offers to retail investors.” So, for example, an RIA offering traditional discretionary asset management, wrap fee programs, and pension plan advice must prepare but one Form CRS discussing all of the aforementioned service offerings.
The second FAQ in the formatting category elaborates on the requirement in General Instruction 7.A.(i) of Form CRS that all Forms CRS must utilize a “text-searchable format” with “machine-readable headings.” The SEC’s guidance on this requirement is that firms must ensure that they are creating their Form CRS documents in such a way that the headings within their documents are searchable and machine readable. To the extent that firms are using the ubiquitous MS Word and Adobe Acrobat, the SEC provides technical line by line instructions on how to achieve this result.
With respect to the delivery-related category of FAQs, the SEC provides specific guidance in connection with the initial delivery of Form CRS, which must occur “within 30 days after the date by which it is first required to electronically file its relationship summary with the SEC.” On this issue, the SEC stresses that firms may choose an initial method that suits the firm’s particular circumstances—such as separate delivery, delivery in bulk, or “as part of the delivery of information that the firm already provides, such as the annual Form ADV update, account statements or other periodic reports.” In this regard, delivery as part of the regular delivery of quarterly account statements would be acceptable.
The final FAQ addresses RIAs that advise hedge funds or other pooled investment vehicles. Specifically, the SEC explains that such RIAs would typically not need to deliver any Form CRS to natural person investors in the funds or investment pools advised by the RIA—even though such natural persons may nonetheless fall within the definition of a “retail investor.” In reaching this determination, the SEC notes that RIAs must initially deliver a Form CRS to each retail investor before or at the time the RIA enters into an investment advisory contract with the retail investor. Since, in the case of hedge funds and other pooled investment vehicles, the RIA only enters into a contract with the fund or investment pool—and not its owners—the delivery requirement to individual fund/pool investors is not implicated.
We will continue to look for additional forthcoming guidance as the rollout date for Form CRS approaches, and provide commentary as warranted.
Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds, and issuers of securities, among others. Our Investment Adviser Group assists financial service providers with complex issues that arise in the course of their business, including complying with federal and state laws and rules. Please visit our Investment Adviser Practice Group page for more information.