Yesterday, the Securities and Exchange Commission (SEC) finalized a new rule that includes a new requirement for SEC-registered investment adviser (RIA) firms to provide a brief relationship summary to retail investors known as the Form CRS. According to the SEC, the new Form CRS “is intended to inform retail investors about: (i) the types of client and customer relationships and services the firm offers; (ii) the fees, costs, conflicts of interest, and required standard of conduct associated with those relationships and services; (iii) whether the firm and its financial professionals currently have reportable legal or disciplinary history; and (iv) how to obtain additional information about the firm.” The new Form ADV Part 3 (“Form CRS”) will be in addition to the currently required Form ADV Part 1 and Part 2 Brochure.
In addition to a detailed overview discussing the rationale for the new Form CRS, the SEC also released detailed instructions for the Form CRS to help firms meet this new regulatory requirement. When introducing the new Form CRS requirement, SEC Chairman, Jay Clayton, stated:
“The relationship summary is designed to help retail investors select or determine whether to remain with a firm or financial professional by providing better transparency and summarizing in one place selected information about a particular broker-dealer or investment adviser. Both broker-dealers and investment advisers must provide plain English disclosures on the same topics under standardized headings in a prescribed order, allowing retail investors to more easily compare services by comparing different firms’ relationship summaries.”
Which RIA firms are impacted by this new rule?
This rule impacts all SEC-registered investment adviser firms that “are required to deliver a relationship summary to a retail investor.” Thus, this new rule will apply to the vast majority of the 13,270 investment advisory firms registered with the SEC as of June 1, 2019.
It’s likely that the new Form ADV Part 3 requirement will also ultimately apply to state-registered RIA firms. However, the applicability and timing may vary by state as further information is disseminated.
When do applicable RIA firms need to initially file and deliver the Form CRS to clients?
According to the SEC’s general instructions, “if you are already registered or have an application for registration pending with the SEC as an investment adviser before June 30, 2020 you must electronically file, in accordance with Instruction 7.A. above, your initial relationship summary beginning on May 1, 2020 and by no later than June 30, 2020 either as: (1) an other than-annual amendment or (2) part of your initial application or annual updating amendment.”
Within 30 days after the firm is first required to file the Form CRS, applicable RIA firms will need to deliver a copy of the firm’s Form CRS to all existing clients. Furthermore, beginning on the date the firm is required to file the Form CRS, the firm must begin to deliver its Form CRS to “new and prospective clients and customers who are retail investors.” In particular, the Form CRS, must be delivered to “each retail investor before or at time you enter into an investment advisory contract with the retail investor.”
Also, if the Form CRS is delivered in paper format “as part of a package of documents, you must ensure that the relationship summary is the first among any documents that are delivered at that time.”
When do RIA firms need to update and file the Form CRS?
Much like the Form ADV Part 2, RIA firms also have related updating and delivery requirements (e.g. when information in the Form CRS becomes materially inaccurate it must be updated and filed within 30 days). In addition, according to the new Form ADV general instructions, firms “may, but are not required, to submit amended versions” of the Form CRS as part of the firm’s annual updating amendment.
Where do applicable RIA firms file and post the Form CRS?
In addition to electronically filing the Form CRS with the Investment Adviser Registration Depository (IARD), RIA firms “must post the current version of the relationship summary prominently on your public website, if you have one, in a location and format that is easily accessible for retail investors.”
What is the length and format of the Form CRS for RIA firms?
The instructions to the Form CRS note, “In paper format, the relationship summary for broker-dealers and investment advisers must not exceed two pages…You must use reasonable paper size, font size, and margins. If delivered electronically, the relationship summary must not exceed the equivalent of two pages…”
Furthermore, “You should include white space and implement other design features to make the relationship summary easy to read. The relationship summary should be concise and direct. Specifically: (i) use short sentences and paragraphs; (ii) use definite, concrete, everyday words; (iii) use active voice; (iv) avoid legal jargon or highly technical business terms unless you clearly explain them; and (v) avoid multiple negatives. You must write your response to each item as if you are speaking to the retail investor, using “you,” “us,” “our firm,” etc.”
What items are required in the Form CRS?
The Form CRS requires the following five items:
- Introduction
- Relationships and Services
- Fees, Costs, Conflicts, and Standard of Conduct
- Disciplinary History
- Additional information
Don’t forget to check out our overview of the 5 required Form CRS items for RIA firms and be sure to check back soon as we continue to further analyze and provide additional detail on this new investment adviser regulatory requirement.