New ADV Part 3: Form CRS For Registered Investment Advisers And Dual Registrants

New ADV Part 3: Form CRS for Registered Investment Advisers and Dual Registrants¹

Filing Requirements for Investment Advisers and Recent Guidance from the SEC

What Is ADV Part 3/Form CRS?

• Client relationship summary (CRS) for registered investment advisers (RIAs), brokerdealers and dual-registrants that advise retail investors, available here (adopting release available here).
• For RIAs, Form CRS is now Part 3 of Form ADV. CRS is designed to assist retail investors with the process of deciding whether to:
  • Establish an investment advisory or brokerage relationship.
  • Engage a particular firm or financial professional.
  • Terminate or switch a relationship or specific service.
• CRS must be filed with the Securities and Exchange Commission (SEC), delivered to a firm's retail investors and prominently posted to the firm's website, if it has one.

Which Investment Advisers Must File?

• An RIA is only required to deliver a CRS to retail clients or their retail client representatives (such as guardians and attorneys-in-fact) if the RIA provides advisory services to a retail client.
  • If the RIA does not have any retail clients, it is not required to draft, file or deliver one.
  • An RIA is not required to deliver a CRS to fund clients or their investors.

"Retail investor" is defined 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.

Deadlines

• For investment advisers that are already registered or have an application for registration pending with the SEC before June 30, 2020:
  • May file beginning on May 1, 2020, and by no later than June 30, 2020, either as (i) an other-than-annual amendment or (ii) part of initial application or annual updating amendment.
• For investment advisers with retail clients that file an application for registration with the SEC on or after June 30, 2020:
  • Any application must include the CRS.
• Updates and amendments:
  • Must file an amendment within 30 days of any information in the CRS becoming materially inaccurate.
  • Must communicate any changes in the updated CRS to existing retail investor clients within 60 days after the updates are required to be made and without charge.
  • Must highlight the most recent changes by, for example, marking the revised text or including a summary of material changes.
    • Must be attached as an exhibit to the unmarked amended CRS.

Form CRS Requirements

• Formatting
• Required topics and "conversation starters"
• Delivery
• Recordkeeping

Formatting

• Plain English: Must be written in plain English, taking into consideration retail investors' level of financial experience.
  • Must be drafted as if the drafter is speaking to the recipient using "you," "us" and "our firm."
  • The SEC has a publication entitled "A Plain English Handbook," available here.
• Headings: Do not use the prescribed item topics as headings.
  • The introduction does not need a heading.
  • For the other topic headings, use the suggested headings in the CRS instructions, but do not include "Item: __" in the title.
  • Headings must be in machine readable format.
• Conversation Starters: Must be formatted to make them more noticeable and prominent than the standard surrounding text.
• Additional Information: Cross reference to other parts of ADV, which must also be formatted to make them more noticeable and prominent than the standard surrounding text.
• Date: Include prominently at the beginning of the CRS.
• Page Limits:
  • For broker-dealers and investment advisers: must not exceed two pages.
  • For dual registrants filing one Form CRS: must not exceed four pages.
• Electronic and Graphical Formatting: Encouraged but not required.
  • Other graphic cues and layered disclosure through hyperlinks, pop-up windows and fee calculators are required if posted on a website.

Required Topics

• Required topics to be included in CRS:
  • Introduction
  • Relationships and services
  • Fees, costs, conflicts and standards of conduct
  • Disciplinary history
  • Additional information.
• Referred to as "items" in the CRS.
• Do not include information that is not responsive to a prompt.
• If the CRS instructions say:
  • "State that": include the language as close as possible to the language provided unless incorrect.
  • "State" or "list": provide a list.
  • "Include": state the text provided unless wholly inapplicable.
  • "Summarize": provide a short summary of other disclosure and, if applicable, cross reference to ADV Part 2A.
  • "Explain": answer the prompt as a complete answer sentence.
  • "Describe" or "summarize": provide a short as possible narrative answer and cross reference to ADV 2A.

Required Conversation Starters

• Conversation starters are awkward questions intended to start conversations about the RIA's conflicts of interest.
• Formatting for conversation starters:
  • Must use text features to make the conversation starters more noticeable and prominent in relation to other discussion text:
    • Use larger or different font.
    • A text box around the heading or questions.
    • Bolded, italicized or underlined text.
    • Lines to offset the questions from the other sections.
  • –If a required topic or conversation starter is inapplicable to your business or specific wording required by the Instructions is inaccurate, you may omit or modify.

Delivery

• Delivery to Existing Retail Clients and Customers:
  • Within 30 days after the date by which you are first required to electronically file the CRS with the SEC.
  • Within 30 days upon the retail investor's request.
  • Delivery must be before or at the time you:
    • Open a new account that is different from the retail investor's existing account(s).
    • Recommend that the retail investor roll over assets from a retirement account into a new or existing account or investment.
    • Recommend or provide a new brokerage or investment advisory service or investment that does not necessarily involve the opening of a new account and would not be held in an existing account.
• Delivery to New and Prospective Retail Clients and Customers:
  • As of the date by which you are first required to electronically file the CRS with the SEC.
  • Delivery must be before or at the time you:
    • Enter into an investment advisory contract with the retail investor.
    • Recommend to a retail investor of an account type, a securities transaction or an investment strategy involving securities.
    • Place an order for the retail investor.
    • Open a brokerage account for the retail investor.

Delivery and Recordkeeping

• If delivered electronically:
  • Must not exceed the equivalent of two pages or four pages in paper format, as applicable.
  • Must be presented prominently in the electronic medium, for example, as a direct link or in the body of an email or message, and must be easily accessible for retail investors.
• If delivered in paper format:
  • Must ensure that the relationship summary is the first among any documents that are delivered at that time.
• Delivery must satisfy the SEC's requirements for delivery, including obtaining specific consent for electronic delivery.
• A dual registrant must deliver the CRS at the earlier of the timing requirements for RIAs or broker-dealers.
• An RIA must keep copies of the CRS and records of each date that the CRS and any amendments are provided to a retail investor, including dates prior to the date the retail investor opens an account or becomes a client.

Recent SEC Guidance

• Risk Alert
  • SEC Office of Compliance Inspections and Examination (OCIE) issued a risk alert on April 7, 2020, regarding inspections for RIA compliance with CRS.
  • Examinations conducted after June 30, 2020, may include assessments regarding compliance with CRS.
  • Comprehensive list of CRS issues staff "may focus on" in an examination, including:
    • Delivery and filing to both existing and new retail investors.
    • Whether a firm's CRS includes all required information.
    • Whether the CRS omits any material facts.
    • Whether the CRS is formatted as required.
    • Policies and procedures for updating filing and distributing updates and how changes are highlighted.
    • How a firm makes and keeps records for CRS and any updates.
• As of now, no extension of filing deadline for CRS, even in light of COVID-19.

Footnote

1. Does not address requirements in detail for registered broker-dealers. This summary is not intended to be a substitute for instructions on the form or legal advice.

Originally published 8 June, 2020

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.