RIA Compliance Blog
As we mentioned in an earlier post, in April of this year the SEC’s Office of Compliance Inspections and Examinations (OCIE) issued separate risk alerts on the subjects of Form CRS and Regulation Best Interest (Reg BI). The risk alerts were designed to provide investment advisers and broker-dealers information regarding the anticipated scope and content of the examinations OCIE will conduct following the filing deadline for Form ADV, Part 3 and following the compliance date for Regulation Best Interest. In this post we examine the new requirements regarding Form ADV, Part 3, which we will refer to as “Form CRS,” and then review the SEC’s Risk Alert relating to Form CRS. Firms seeking to comply with the new requirements should carefully review the 17-page instructions to Form CRS. The SEC has also published a helpful Small Entity Compliance Guide.
Under the new requirements, federally registered RIAs must electronically file Form CRS via the IARD system and must deliver a Form CRS to all retail investors, regardless of net worth or sophistication. Currently registered RIAs or entities who currently have pending applications to become RIAs may file their form CRS at any time, but they must file the initial CRS on or before June 30, 2020. The Form CRS may be filed as part of an initial application to register under Rule 203-1, or as an other-than-annual amendment to the Form ADV under Rule 204-1. Beginning June 30, 3020, any new application will be considered incomplete and will be rejected if it does not contain a Form CRS. Every RIA’s firm must post its Form CRS on its public website, but there is no requirement that a firm without a public-facing website must create one.
The requirements for delivery of Form CRS differ slightly depending on whether the delivery is to an existing client or a prospective client. After the initial delivery to existing clients, the RIA must provide the Form CRS to the same client again in certain situations. As for new clients and prospects, the simplest way to comply with the delivery requirements is to deliver Form CRS before the RIA does any of the following: (1) makes a recommendation (including a recommendation to open an account or roll over assets to an IRA); (2) opens a new account for the client or requests that the client complete a new custodial account form; (3) asks the client to sign an investment advisory agreement or an application for any investment held away from the custodian; or (4) places the first trade for the client.
The Risk Alert states that OCIE will conduct examinations of RIAs after June 30, 2020 that focus on compliance with Form CRS. Those examinations will seek to determine whether the firm has made an effort in good faith to implement the new Form CRS requirements. The specific issues examined will include: (1) whether the firm complied with both the delivery and filing requirements; (2) whether the form instructions regarding mandatory content and formatting were followed; (3) whether the statements made in the Form CRS are accurate and not misleading; (4) whether the firm adopted policies and procedures reasonably designed to comply with the Form CRS on an ongoing basis; and (5) whether the RIA maintains the records required by the new rule. Notably, this last category requires the RIA to keep all iterations of Form CRS together with proof of delivery to all retail investors and the date such delivery was made.
The Risk Alert also provides examples of the kinds of specific questions OCIE’s examiners will review. These include: (1) whether the firm accurately describes its relationships with its clients and the services it offers; (2) whether the adviser’s investment authority and account review processes are accurately described; and (3) whether the firm’s fees and other costs clients must pay are correctly described. Notably, a firm must describe not only the adviser’s fee but also “other fees and costs related to services and investments that retail investors will pay directly or indirectly.” The instructions to Form CRS require the firm to provide examples of the types of fees clients will most commonly pay either to the adviser, the custodian, a product sponsor, or some other third-party. An RIA can expect OCIE’s staff to review fee schedules, advisory agreements, custodial account agreements and other documents to determine whether fees paid by clients are disclosed in Form CRS. Naturally, conflicts of interest must be disclosed and accurately described.
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.