United States: SEC Adopts Form CRS (Client Relationship Summary) For Advisers And Broker-Dealers

On a June 5, 2019, the SEC adopted Form CRS (“relationship summary”), along with new and amended rules and forms, to improve retail investors’ understanding of the different investment-related services provided by registered broker-dealers, registered investment advisers and dually registered firms (each, a “firm”).

At the same meeting, the SEC also adopted Regulation Best Interest and published two interpretive releases regarding (i) the standard of conduct for investment advisers under the Advisers Act and (ii) the “solely incidental” prong of the broker-dealer exclusion in the Advisers Act Section 202(a)(11)(C). Regulation Best Interest and the two interpretive releases are covered in separate Ropes & Gray Alerts.

The Form CRS rulemaking (the “CRS Release”) is described in detail below.

Overview

The CRS Release adopted Advisers Act Rule 204-5 and Exchange Act Rule 17a-14, which will require a firm to deliver to retail investors its current Form CRS. A firm that does not have any retail investors to whom the firm would be required to deliver a Form CRS is not required to prepare or to file a Form CRS.

In a Form CRS, a firm is required to describe the nature and scope of services provided by the firm, the types of fees customers will incur, the conflicts of interest faced by the firm, and the firm’s disciplinary history.

Form CRS has been streamlined compared to the form that the SEC proposed in 2018. A firm’s Form CRS cannot exceed two pages (or the equivalent, if provided in electronic format). If a dual registrant – i.e., a dually registered firm that offers services to retail investors as both a broker-dealer and an investment adviser – decides to provide a combined Form CRS, the combined form cannot exceed four pages.1

Firms must file their initial Form CRS and post their Form CRS prominently on their websites no later than June 30, 2020.

The Appendix to this Alert describes the mechanics of filing, delivering, amending and otherwise satisfying the legal requirements with respect to a firm’s Form CRS. This includes a summary of the required contents of the streamlined Form CRS.

Who is a Retail Investor?

The CRS Release defines “retail investor” as “a natural person, or the legal representative of such natural person, who seeks to receive or receives services primarily for personal, family or household purposes.” This definition is revised from the definition proposed by the SEC in 2018, which included “a trust or other similar entity that represents natural persons, even if another person is a trustee or managing agent of the trust.” The 2018 definition introduced some confusion among industry observers regarding the breadth of the definition, which could be read to include a private fund and its investors. The adopted definition, by narrowing the types of representatives (of natural persons) who can be deemed retail investors, reduces without eliminating this confusion. From the revisions to the definition and from the discussion in the CRS Release, it does not appear that the SEC intended to include private funds and their investors within the adopted definition of retail investor. 

The CRS Release narrows the types of representatives who can be deemed retail investors by clarifying that a “legal representative” of a natural person, as used in the definition “retail investor,” includes only “non-professional” legal representatives, such as a non-professional trustee representing a natural person’s assets (as well as analogous representatives such as executors, conservators and persons holding a power of attorney for a natural person). The CRS Release states that the term “non-professional legal representative” is intended to include persons who are acting on behalf of a natural person and “who are not regulated financial services professionals retained . . . to exercise independent professional judgment.” Thus, natural persons who participate in a wrap fee program, where the investment adviser sponsor of the program exercises its independent judgment on behalf of the program’s participants, should be deemed retail investors only with respect to the investment adviser (and affiliated firms, if any) sponsoring the wrap fee program. On the other hand, a family office that is not required to register as an investment adviser by operation of Rule 202(a)(11)(G)-1 under the Advisers Act could be a retail investor. Other fact patterns may present greater uncertainty.

Consistent with the 2018 proposal, the adopted retail investor definition captures natural persons without regard to a natural person’s assets or net worth. The CRS Release states that “all individual investors would benefit from clear and succinct disclosure regarding key aspects of available brokerage and advisory relationships.” It follows that even an ultra-high net worth natural person can be a retail investor if the person is unrepresented or the person’s legal representative is a non-professional legal representative. This underscores that a natural person’s status as a retail investor may depend on the type of representative who stands between the investor and a firm. Consequently, for an institutional manager seeking to determine whether it has a Form CRS delivery obligation to a natural person who might be deemed a retail investor client, the analysis will focus on whether a regulated financial services professional exercising independent professional judgment stands between the institutional manager and the natural person.

With respect to participants in 401(k) plans and other workplace retirement plans,2 the CRS Release clarifies that the definition of retail investor includes a natural person who is seeking to select or retain a firm for brokerage or advisory services for the person’s workplace retirement account (this includes but is not limited to IRAs and individual accounts in workplace retirement plans). However, according to the CRS Release, participants in 401(k) plans and other workplace retirement plans are not retail investors for purposes of a Form CRS delivery obligation when participants are making ordinary plan elections that do not involve seeking to select or retain a firm for brokerage or advisory services.

Observations

  1. Narrowing “Retail Investor” Definition. A firm that does not have any retail investors to whom the firm would be required to deliver a Form CRS is not required to prepare or to file a Form CRS. Therefore, we expect that many of our clients that are registered investment advisers to institutional separate accounts, private funds and registered funds will be able to interpret the revised definition of “retail investor” to avoid Form CRS entirely.

  2. Disclosure Streamlining. To its credit, the SEC recognized that the SEC website is a better place for the abundance of educational and scripted disclosure that the SEC proposed in 2018. Therefore, the new requirement in Form CRS – to include an introductory paragraph with a link to the SEC’s investor education website – also is a commendable change.

    In turn, this approach allows for a streamlined, two-page Form CRS that relies more heavily on layered disclosure and a notice-and-access electronic delivery regime. It follows that Form CRS is consistent with other SEC disclosure initiatives and appears to suit retail investors’ preferences.3

    Some caution is justified regarding the ultimate utility of Form CRS. In this vein, the CRS Release stated that “to help ensure that [Form CRS] fulfills its intended purpose, we have directed our staff to review a sample of relationship summaries that are filed with the Commission beginning after June 30, 2020 . . . and to provide the Commission with the results of this review.” The staff’s conclusions will be of interest to confirm or improve Form CRS’s utility.

  3. Guidance Relevant to Form ADV. The CRS Release provides some useful guidance to investment advisers required to make an off-cycle amendment to a Form ADV. Form ADV’s instructions require an investment adviser to amend Part 1A, 1B, 2A and 2B (as applicable) of its Form ADV “promptly” upon the occurrence of certain specified events, but the SEC has never provided guidance regarding the meaning of “promptly.” An investment adviser’s Form CRS is required to be filed (as new Part 3 of its Form ADV) by the Investment Adviser Registration Depository (“IARD”) (as it files its Form ADV Parts 1A and 2A).

    The CRS Release provides that an investment adviser is required to amend and file its Form CRS within 30 days whenever any information in the Form CRS “becomes materially inaccurate,” by filing the amendment with the SEC by IARD. Discussing the 30-day period, in the CRS Release, the SEC stated that, “[b]ased on our experience with other similar filings, we believe the proposed [30-day] approach is consistent with the current requirements for investment advisers to update the Form ADV Part 2A brochure.” This is a helpful express statement about the SEC’s expectations regarding the timing of an amendment to a now-in-force Form ADV that is required to be made “promptly.”

* * *

The Appendix to this Alert describes the mechanics of filing, delivering, amending and otherwise satisfying the legal requirements with respect to a firm’s Form CRS.  This includes a summary of the required contents of the streamlined Form CRS.

Footnotes

1 Dual registrants also have the flexibility to prepare separate Forms CRS, neither exceeding two pages, for its brokerage services and for its investment advisory services. Affiliated broker-dealer and investment adviser firms have the same flexibility to prepare a single combined Form CRS of up to four pages.

2 The CRS Release clarifies that workplace retirement plans also include "any arrangement available at a workplace that provides retirement benefits or allows saving for retirement, including, for example, any 401(k) plan or other plan that meets requirements for qualification under [IRC] section 401(a), deferred compensation plans of state and local governments and tax-exempt organizations described by Code section 457, and annuity contracts and custodial accounts described by [IRC] section 403(b)."

3 See e.g., Securities Act Rule 498 (layered disclosure); 1940 Act Rule 30e-3 (notice-and-access electronic delivery).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions