In 2019, the Securities and Exchange Commission (SEC) changed the reporting requirements for registered investment advisers (RIAs) by including a Part 3 for Form ADV. More commonly referred to as a Form CRS, this fairly new disclosure is intended to summarize important, non-technical information to clients in plain English.
According to the SEC’s guidelines, the form should utilize design features that make it easy to read and understand. Form CRS is meant to be concise and direct and should not exceed two pages.
The good news for SEC-registered advisers is that the Form CRS has a fairly prescriptive format, which offers helpful guidance on what should and shouldn’t be included – and we’ve broken down all five sections here!
Section 1: Introduction
Form CRS should start off with the basic information about your firm. Along with your firm’s name and the date, you’ll need to indicate how you’re registered (as an investment adviser or broker-dealer with the SEC). Your introduction will also need to indicate that brokerage and investment advisory services fees differ, allowing any current or potential retail clients to understand the difference. Finally, include in your introduction a link to Investor.gov/CRS and state that investors can use that site to obtain free tools for researching firms and financial professionals, as well as educational resources for learning more about investing, investment advisers, and broker-dealers.
Section 2: Relationships and Services
Your section two heading should read, “What investment services and advice can you provide me?”
Within the “Description of Services” portion, let the client know type(s) of investment advisory services the RIA offers (such as financial planning or portfolio management) to retail investors. Section two will also need to include information on monitoring, minimum account size, and investment authority:
- Monitoring
Include information regarding the frequency of monitoring, material limitations, and whether monitoring is provided as part of your standard services or is offered as a supplemental service.
- Minimum account size
If you have a minimum account size requirement for new clients, make sure it is included in section two.
- Investment authority
If you’re accepting discretionary authority, detail what that entails and include any material limitations. If you’re offering non-discretionary services, your Form CRS should explain to the client that they are the ultimate decision-maker when it comes to purchasing or selling investments.
Section 3: Fees, Conflicts, and Standard of Conduct
Section three should be titled “What fees will I pay?” and, as it sounds, will cover all things relating to your fee arrangements, additional costs, and obligations within the adviser-client relationship.
Fees and Expenses
You are required to summarize your advisory fees and all costs that your client (the retail investor) will incur for utilizing your services. The principal fees discussed in your Form CRS need to align with the fees reported in response to Item 5.E of Form ADV Part 1A and Item 5 of Form ADV Part 2A. Within this section, you’ll also want to detail how frequently fees are assessed.
Firms must be sure to describe any ongoing asset-based fees, fixed fees, wrap fee program fees, or other direct fee arrangement. Regarding wrap fee program fees, the RIA should include additional context and explanation about how these programs work, specifically how they may differ from a typical (non-wrap) asset-based advisory fee.
Additionally, include the additional third-party fees a client could incur ,including:
- Custodian fees
- Account maintenance fees
- Fees related to mutual funds and variable annuities
- Transactional or product-level fees
Conflicts of Interest
Investment advisers must include additional verbiage in section three that reads: “What are your legal obligations to me when acting as my investment adviser? How else does your firm make money and what conflicts of interest do you have?” Then, they must include the following statement:
“When we act as your investment adviser, we have to act in your best interest and not put our interest ahead of yours. At the same time, the way we make money creates some conflicts with your interests. You should understand and ask us about these conflicts because they can affect the investment advice we provide you. Here are some examples to help you understand what this means.”
Section three of Form CRS goes on to explain any potential conflicts of interest resulting from the RIA’s fee structure. For example, if a firm charges an asset-based fee, then it may include a statement explaining that the higher the assets in the account, the higher the advisory fee will be, and therefore the adviser is incentivized to increase the assets in the client’s account.
You should also disclose potential conflicts relating to proprietary products, third-party payments, revenue sharing, and principal trading. Note that any information you share in this section regarding conflicts of interest needs to reflect what’s included in your Form ADV Part 2A brochure.
Standard of Conduct
The third and final heading in section three should say, “How do your financial professionals make money?” Under this heading, summarize how your firm’s investment adviser representatives (IARs) are compensated (including non-cash compensation), as well as potential conflicts of interest created as a result of those payments.
You may need to provide additional details about IAR compensation depending on:
- Amount of client assets under management
- Time and complexity required to meet a client’s needs
- Products sold
- Commissions
- Revenue earned from advisory services or recommendations
Section 4: Disciplinary History
The heading for section four should say, “Do you or your financial professionals have legal or disciplinary history?” Here, you’ll state either “yes” or “no” depending on whether your firm or its personnel have disciplinary disclosures on other documents, including:
- Form ADV Part 1A Item 11
- Form ADV Part 2A Item 9
- Form BD Items 11 A-K
- Form U4 Items 14 A-M
- Form U5 Item 7A
- Form U5 Items 7C-F
- Form U6
Section 5: Additional Information
Section five should be used to provide additional resources for clients. Let readers know where they can find a copy of the Form CRS and include a telephone number to request more details about your RIA.
Feeling Frustrated by Filings? COMPLY Can Help
Meeting the Form CRS requirements and ensuring accuracy in complex filings can be a challenge for even the most well-staffed teams. COMPLY’s Regulatory Filing Services team of experts alleviates this burden by conducting the filing process for you.
Our gurus will handle your Form CRS and other regulatory filings with both accuracy and efficiency. They stay up-to-date on the latest investment adviser regulations to ensure your filings are compliant, which frees up your internal staff to focus on other value-adding tasks!
As you know, Form CRS is just one piece of the much larger regulatory puzzle that comes with being an RIA. We understand the challenges and complexities of RIA registration and ongoing compliance, which is why we provide tailored consulting and technology services to help you adhere to your specific requirements.
Are you ready to connect with our experts to ensure you’re filing all required documents on time, every time? Let’s talk!