The Securities and Exchange Commission issued a statement recently reinforcing the requirement for clear and simple language when it comes to Form CRS, the client relationship summary document now required as part of Regulation Best Interest.
In a Dec. 17 Staff Statement Regarding Form CRS Disclosures written by the SEC’s Standard of Conduct Implementation Committee, the Committee shared observations about areas where Form CRS compliance improvements appear to be needed. Particularly, brokerages and investment advisory firms need to more clearly disclose their fees and explain their conflicts of interest without using confusing industry jargon in the disclosure document.
Some examples of jargon called out by the Committee include terms such as ‘riskless principal,’ ‘in arrears,’ ‘markups’ and ‘markdowns,’” or citing specific SEC rules without providing clear explanations.
The two-page relationship summary is intended to promote transparency, comparability and better-informed decision-making, through clear, concise disclosures, and by summarizing in one place selected information about a particular firm. This format is designed to allow retail investors to more easily compare different firms’ services, fees, conflicts of interest, disciplinary history and other important information.
SEC rules require that firms deliver their relationship summaries to new and prospective retail clients and customers, as well as to existing retail clients and customers, file their relationship summary with the Commission and post the current relationship summary on the firm’s public website, if the firm has one.
To help evaluate whether the relationship summary is fulfilling its intended purpose, the Committee reviewed filed relationship summaries from a diverse cross-section of firms and observed how firms have implemented the content and format requirements of Form CRS. Additionally, the Division of Examinations and FINRA have been examining firms to assess compliance with the Form CRS requirements.
Many of the Committee’s and FINRA’s initial observations regarding firms’ compliance with Form CRS were shared during an October 26, 2020 Roundtable on Regulation Best Interest and Form CRS. The Committee’s review of relationship summaries observed good examples of simple, clear disclosures, including relationship summaries that provided balanced and objective descriptions of services, direct and concise explanations of fees, and avoided extraneous language and legal jargon.
At the same time, the Committee observed areas where compliance improvements appear to be needed, and the statement goes on to provide guidance in 11 different areas:
• Use of Technical Language, Including Disclaimers
• Omission of Required Information
• Reliance on Proposed, Rather than Final Instructions
• Lack of Specific References to More Detailed Information
• Shortcomings in Descriptions of Relationships and Services; Fees, Costs, Conflicts, and Standard of Conduct
• Modification and/or Supplementation of the Disciplinary History Disclosure
• Issues with Prominently Displaying Relationship Summary on Firm Website
• Issues with Description of Affiliate Relationships
• Poor Design
• Use of Marketing Language
• Boilerplate
The Committee concluded its statement by encouraging firms to familiarize themselves with the specific requirements of Form CRS by reviewing the Form CRS Adopting Release, the Small Entity Compliance Guide, the Frequently Asked Questions on Form CRS and the SEC Spotlight page on Regulation Best Interest, Form CRS and Related Interpretations.
In addition, the Committee noted that firms with interpretive questions regarding Form CRS may submit questions to IABDQuestions@sec.gov.
SEE ALSO:
• Envestnet, CSS Partner to Help Advisors Meet Reg BI’s Form CRS Requirement
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
