RIA Compliance Blog
Last week the Securities and Exchange Commission (“SEC”) and the Financial Industry Regulatory Authority (“FINRA”) released updated guidance to the disciplinary disclosures section of Form CRS. The purpose of Form CRS is to provide a succinct summary of the business of the Investment Adviser or Broker-Dealer to provide a retail investor with the proper information to make an informed decision regarding whether an investment advisory or brokerage relationship is in the best interest of the investor. Form CRS also provides a platform to generate questions for clients to ask their financial professional to spark a conversation regarding the disclosures. Likewise, the purpose of the disciplinary section of the Form CRS is to give an overall indication as to whether the firm or its financial professionals have disciplinary history to disclose.
The SEC and FINRA place a high level of importance on ensuring that firms adequately disclose their disciplinary history to provide full and accurate disclosure to retail investors. Since June 30, 2020, the required implementation date of Form CRS, the SEC and FINRA have examined investment advisers to determine compliance with the guidance regarding Form CRS and Regulation BI. In its examinations, the regulators determined that many investment advisory and brokerage firms were either not providing a response to the disciplinary section or providing more details than the section’s instructions require. The following are summaries of the updated guidance on Form CRS disciplinary disclosures:
- While instructions to Form CRS allow firms some flexibility in their responses, firms must answer whether they or their financial professionals have disciplinary history with a yes or no answer.
- Firms are permitted to bifurcate their answer to the disciplinary history section. This means that if a firm has disciplinary history but its financial professionals do not have disciplinary history (or vice versa), a firm can provide a disclosure like this:
- Do you or your financial professionals have legal or disciplinary history?
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- Yes for our firm. No for our financial professionals.
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OR
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- Firm – yes. Financial professionals – no.
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- Firms are also not permitted to provide any additional details in response to this question other than yes or no because the SEC believes it may unintentionally minimize or emphasize an aspect of the disclosure. The SEC wants this question to generate a conversation between the firm and its retail investors.
- Firms are permitted to provide supplemental regulatory disclosures to retail investors separate from the Form CRS such as Form ADV Part 2B or disclosure reporting pages from Form U4.
The SEC plans to host a regulatory roundtable discussion on October 26, 2020 to discuss the observations from both the SEC and FINRA on implementation of Regulation BI and Form CRS. Part of the roundtable will address deficiencies regulators have noticed in their examinations. The regulatory roundtable is open to the public with an online broadcast and will be archived for viewing if you cannot attend.
It is also likely that additional clarifications will be added to the instructions of Form CRS in the coming months based on the examinations of both SEC and FINRA regulated firms.
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. If you want to discuss changes to your firm’s Form CRS, please contact Parker MacIntyre or our affiliated compliance consulting firm, Century Compliance, LLC, at (678) 902-4060.