Securities Regulation Daily SEC statement offers preview of Form CRS compliance issues
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Monday, July 27, 2020

SEC statement offers preview of Form CRS compliance issues

By Mark S. Nelson, J.D.

The SEC’s committee reviewing Forms CRS filed in conjunction with newly required Regulation Best Interest disclosures says firms could do better in drafting their relationship summaries on Forms CRS.

The SEC’s staff Standards of Conduct Implementation Committee issued a statement on its preliminary review of Forms CRS filed with the Commission as part of the recently fully effective retail investor reforms contained in Regulation Best Interest. Overall, the committee’s public statement suggested that some firms could do a better job of meeting the content and format requirements of the relationship summary that are spelled out in Form CRS.

The SEC’s Regulation BI, with which firms must comply as of June 30, 2020, established a new best interest conduct standard that broker-dealers must satisfy when making recommendations about securities to retail investors. The Regulation BI rulemaking also included a separate SEC release mandating that broker-dealers and investment advisers make certain disclosures to retail investors in a relationship summary that must comply with requirements contained in new Form CRS.

The SEC committee’s statement did not single out a particular type of disclosure that had been reviewed and found problematic, but it did suggest that completeness and clarity might be issues for some firms. "The relationship summaries reviewed to date generally reflect effort by firms to meet the content and format requirements of Form CRS, and the Committee’s initial reviews have identified good examples of simple, clear disclosures. At the same time, the Committee’s initial reviews have identified examples that may lack certain disclosures or could be clearer or otherwise improved," said the committee statement.

Form CRS contains some highly specific requirements regarding the content of the relationship summary, including the prominent presentation of conversation starters—questions that retail investors can ask of their broker-dealer or investment adviser to better understand the scope of services and products being offered to them. Form CRS also sets limits on how Forms CRS should be formatted and on the length of the relationship summary (generally 2-4 pages in print with similar electronic length limits). In other respects, however, Form CRS encourages a degree of creativity in presenting information, such as by "charts, graphs, tables, and other graphics or text features" or "online tools that populate information in comparison boxes based on investor selections."

The committee was established upon the Commission’s adoption of Regulation BI and Form CRS as an inter-divisional effort to review Forms CRS and includes staff from the Division of Investment Management, the Division of Trading and Markets, the Division of Economic and Risk Analysis, and the Office of Compliance Inspections and Examinations (OCIE). The committee’s statement said its members would engage with firms regarding Form CRS best practices and that some firms may need to consider amendments or larger changes in approach to their Forms CRS. The committee also said that, with respect to firm engagement, it plans to host a roundtable on Form CRS compliance later this year.

Previously, OCIE said its initial reviews of firms’ Forms CRS would emphasize whether firms had made a good faith effort to comply with Form CRS’s requirements. Likewise, OCIE’s initial reviews of compliance with Regulation BI also will focus on firms’ good faith compliance efforts.

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