SEC Releases a Statement Regarding Form CRS Disclosures

    

SEC Releases a Staff Statement Regarding Form CRS Disclosures

On December 17, 2021, The Securities and Exchange Commission (“SEC”) released a Staff Statement Regarding Form CRS Disclosures. The purpose of form CRS is to provide transparency in order for retail investors to make informed decisions in regards to their relationship with a broker-dealer, investment advisor, or a combination of both. This relationship summary must use plain English to answer the specific topics in a given order including unified headings.This form is required to be delivered to every new and potential retail client and be posted with easy access on the firm's public website if applicable. 

A wide range of filed relationship summaries were reviewed by The Standards of Conduct Implementation Committee (the “Committee'') and this release describes what firms are doing well in their relationship summaries, as well as areas that can be improved upon. The common deficiencies addressed by the Committee are described below:

• Use of Technical Language - Some firms included legal jargon and highly technical business terms such as; riskless principal, markups, and citing SEC rules without clear explanations are not permitted. No additional disclosures should be included besides the ones permitted and required. 
• Omission of Required Information - Many advisors were found to be omitting required disclosures such as headers, prescribed language, or conversation starters related to conflicts of interest, investment authority, monitoring services, and disciplinary history.  
• Reliance on Proposed, Rather than Final Instructions - The Committee also noted that many advisors failed to include the required information, modified prescribed language, or failed to follow the prescribed order of formatting. It is important to note that when creating a relationship summary the final instructions to Form CRS should be used. 
• Lack of Specific References to More Detailed Information - Numerous reviewed summaries did not include hyperlinks or provide instructions on where more detailed information could be found. These findings are in reference to Form ADV PArt 2A, Regulation Best Interest, as well as fee information.
• Shortcomings in Descriptions of Relationships and Services; Fees, Conflicts, and Standard of Conduct 
• Monitoring - Various relationship summaries reviewed failed to describe the evaluation frequency of client investments and whether or not the firm has any material limitations on its monitoring services. 
• Investment Authority - The description of the firm’s investment authority including who makes the investment decisions, specifically the purchase or sale of investments in the types of accounts were not included. For firms that partake in both discretionary and non-discretionary authority the services offered to each authority were not accurately defined.
• Limited Investment Offerings - Many advisors failed to include if the firm has any product limitations and a description of such as required by the SEC.
• Principal Fees and Costs - Some relationship summaries failed to include detailed descriptions of principal fees and costs as well as how they are assessed and billed. In the same regard, associated conflicts of interest or incentives were not defined as well.
• Wrap Fee Program Offerings and Fees - Some firms’ relationship summaries did not accurately reflect the fees and costs nor did they state the services included as part of the wrap program. The Committee also suggests that firms should explain how wrap fee program fees are higher than asset-based advisory fees because wrap fees include most transaction costs and fees to a broker-dealer or bank that has custody of these assets. 
• Extraneous Disclosures Regarding Standards of Conduct - Multiple firms used terms such as fiduciaries or fiduciary duty rather than using the prescribed language in Item 3 of the form.
• Firm and Financial Professional Compensation Arrangements and Conflicts of Interests - Various relationship summaries explained how the firm mitigates risk rather than specifically explaining the incentives created by a certain conflict of interest and when they would exist. 
• Modification and/or Supplementation of the Disciplinary History Disclosure - Many relationship summaries omitted or modified the heading of the Disciplinary History section and added more context to their answer rather than the only permitted answers, “yes” or “no.” It is also important to note that some firms removed this section or left it blank which is not permitted.
• Issues with Prominently Displaying Relationship Summary on Firm Website - Some firms failed to display their relationship summary on their webpage or made it difficult for the client to access and locate it on their website. Other specific difficulties addressed included the use of small or hard-to-read text in the hyperlink, non-descriptive terms or phrases to label the summary, not placing the hyperlink on the homepage, and placing the link on the disclosures page. 
• Issues with Description of Affiliate Relationships - Many affiliated firms declined to state what services or investment products discussed are related to which firm. They also did not make it clear as to what disclosures apply to a particular firm or both. In other instances, multiple affiliated entities were listed but failed to describe the relationship between the firm and the entities. While the preparation of separate relationship summaries is permitted some firms who partook in this action did not provide a way of obtaining the summaries of their affiliates.
• Poor Design - Various firms did not use the required text features, made poor use of white space and interactive features such as graphs and tables.
• Use of Marketing Language - Some relationship summaries included marketing language or used superlative descriptors which are not permitted. Specifically, the Committee noted the use of the language, “being held to the highest possible legal standard” is not permitted.
• Boilerplate - Words such as “may '' in relation to a firm's conflicts were seen to be used which defeats the purpose of transparency. Many firms that used widely shared templates did not make the appropriate modifications needed to relate to their specific firm.

Best Practices

The main goal of a relationship summary is to make it easy for retail investors to read and comprehend the important information of a firm in order to make an informed decision with full and fair disclosure. It is important to put your clients' and potential clients' needs before your own in all aspects of the relationship and we can apply this to the relationship summaries as well. We suggest reviewing your firm's relationship summaries to ensure that they are up to the standards of the Committee. When conducting this review use the final instructions to Form CRS as a reference. Remember, that the only permissible disclosures are listed in the final instructions as well and the addition of others is not permitted. It is important to remove any words such as “may'' or marketing language as this may prevent the retail client from being able to evaluate the firms’ services. Lastly, ensure that your firm’s relationship summary clearly identifies conflicts and how these conflicts are relevant to the retail client. 

AdvisorAssist, LLC can provide your firm with actionable advice and filing of Form CRS to prevent your firm from facing any of these deficiencies defined above. Contact us at 617-800-0388 with any questions you may have.

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