OCIE issued a Risk Alert to provide broker-dealers and investment adviser with information about the scope and content of initial examinations after the compliance date for Form CRS. The Risk Alert indicates that initial examinations will focus on assessing whether firms have made a good faith effort to implement Form CRS and highlights the following areas:
- Delivery and filing – OCIE may review whether a firm has appropriately filed and delivered its Form CRS. In particular, OCIE may review records of the dates that each relationship summary was provided to retail investors to validate whether the firm has complied with the delivery obligations.
- Content – OCIE may review content, including the areas prescribed in the instructions to Form CRS.
- Recordkeeping – OCIE may review the firm’s records related to delivery of the relationship summary, and the policies and procedures regarding such records.
The Risk Alert also highlights that OCIE may, over time, review whether a firm appropriately updates its Form CRS.
On February 11, 2020, the staff of the Securities and Exchange Commission (SEC) updated its Frequently Asked Questions on Form CRS with regard to a number of topics:
Legal Representative: Similar to the update on Regulation Best Interest, the staff clarified that the term “legal representative” would not cover regulated financial services industry professionals including a workplace retirement plan representative (e.g., plan sponsor, trustee, other fiduciary), except in limited circumstances. The staff further noted, however, that a formerly regulated financial services industry professional who is not currently regulated, would be considered a “non-professional” and, thus, a covered legal representative.
Delivery requirements: The staff clarified that where one adviser (Firm A) provides advice to another unaffiliated adviser (Firm B) but has no advisory contract (oral or written) with Firm B’s clients, absent other facts or circumstances that would indicate that Firm A provides investment advisory services to Firm B’s retail investor clients, Firm A would not be required to deliver a Form CRS to Firm B’s retail investor clients. The staff also indicated that an amendment to an existing account agreement solely to add another account holder or beneficiary would not trigger a Form CRS delivery requirement but that converting an account at a dual registrant from a brokerage account to advisory account (and presumably vice versa) would require delivery of Form CRS even if the investor initially received Form CRS upon opening the original account. The staff also clarified that a broker-dealer acting solely as a qualified custodian to an investment adviser’s retail investment advisory clients would not need to deliver a Form CRS. Finally, the staff discussed when a state-registered adviser transitioning to SEC registration is required to deliver its Form CRS.
Affiliates: The staff clarified that affiliated investment advisers (or affiliated broker-dealers) may create and deliver a combined Form CRS. The staff also indicated that a firm with multiple affiliates can combine disclosure in one Form CRS, but the staff cautioned that the page limits still apply and that the firm “should be mindful of the potential that additional information from multiple affiliates could “obscure or impede understanding.” It also should be mindful that it is required “to present brokerage and investment advisory information with equal prominence and in a manner that clearly distinguishes and facilitates comparison.”
Sub-advisers: The staff stated that in circumstances where an adviser replaces a sub-adviser, and there are no changes to the advisory agreement, services, investments, or conflicts of interest that would make the information in the adviser’s Form CRS materially inaccurate, the staff would not object if the firm does not consider this a material change that would require the adviser to amend its Form CRS. The staff did not clarify the types of changes to the advisory agreement, services, investments or conflicts that would be considered material changes.
Disciplinary history: The staff clarified that a firm that reports disciplinary history related to its parent company in response to Item 11 on the firm’s Form ADV and Items 11A-K on the firm’s Form BD must answer “yes” to Item 4 in Form CRS.
Foreign language: Finally, the staff stated that it would not object to the delivery of a complete translation of Form CRS in a foreign language so long as the firm also delivers a separate English Form CRS at the same time.