Advisory firms are preparing for Regulation Best Interest’s implementation on June 30, including the mandate to craft a Form Client Relationship Summary (CRS). The summary is meant to detail the “client/advisor” relationship and be delivered to all retail clients. In the rule, the SEC demands that Form CRS be written in “plain English” and take into consideration retail investors’ “level of financial experience.”
Easier said than done. While the SEC wants advisors to provide clients with simple, accessible summaries of their services, the Form CRS is also a compliance document that must disclose all information on fees, conflicted business arrangements and the details of their relationships with their customers, in two pages. Some firms are struggling to balance accessibility with regulatory compliance and questioning what “plain English” really means.
While the SEC has delivered some guidance on what simplicity means in the past (including the 1998 book A Plain English Handbook: How to Create Clear SEC Disclosure Documents), the requirement is a hurdle, according to Todd Pouliot, an investment advisor representative at the Ohio-based firm Gateway Financial.
“Plain English is one thing, but disclosing actual value is difficult, and I don’t think the consumer will be easily aware of the discrepancy between clarity and plain English,” he said. “Describing complexity does not equal clarity.”
Additionally, the mandated brevity of the CRS (which has vexed firms during the run-up to implementation) adds more obstacles, according to Deborah Bosley, the executive director of The Plain Language Group, which advocates for more accessible language in financial services compliance documents. The SEC has demanded that brokers and RIAs must limit their CRS to two pages (or four for firms offering brokerage and advisory services).
“They’re requiring a lot … that I’m not even sure plain language can deliver in two pages,” she said. “When the subject is complex, you may need more words to simplify it. It’s not merely eliminating complex words, but it’s explaining the concepts and meaning.”
Bosley, who’d previously criticized the SEC for the obtuse language contained in the Reg BI rule itself, said at the very least plain English requires eliminating the industry jargon. Too often, compliance documents like the Form CRS are left to lawyers and compliance officers trained to rely on traditional, careful and complex language and sentence structures, as well as the industry jargon meant to give an impression of sophistication and specialized knowledge.
“The hardest thing is to get compliance or legal or whoever is writing it to eliminate jargon. For example, they keep talking about aggregating accounts; what they really mean is just grouping them together,” she said. “If they did nothing else but eliminate the financial jargon, I think that in and of itself would be a huge step forward.”
Bosley said firms should use formatting options like lists or bullet points to make dense information more readable and test the language by sharing drafts with current clients.
“Your brand is not just marketing materials or client engagement; it’s every piece of written communication that gets in the hands of your clients,” she said. “People have a right to understand information that affects their lives.”
Firms should use active voice when creating these documents, according to Fergal McGovern, the CEO of VisibleThread, a Dublin-based tech provider that helps firms translate complex written documents into plain English text. His firm helps clients see the quality of writing across an organization, going so far as to count the number of syllables per word and the number of words per sentence.
But automated solutions alone will not make compliance documents more readable for the layman investor, he said.
“At the end of the day there is a human judgment to be made,” he said. “There’s no magic silver bullet.”
A larger hurdle is likely to be the second item of the Form CRS, which is intended to describe the advisor’s relationships with and services for clients. That can include a wide variety of topics, including financial planning, investment management and consulting.
Dan Bernstein, the chief regulatory counsel at MarketCounsel, said any of an advisor’s professional activities could take up a number of sentences on their own, easily filling an entire page, given that Form CRS makes it clear firms must use reasonable font sizes and margin lengths (in other words, firms can’t use very small type to make sure they include all necessary information).
Bernstein said RIAs would have a much easier time crafting their Form CRS compared with brokerage firms, as RIAs will likely be able to pull much of the pertinent content for their CRSs straight from Form ADVs they’ve already completed.
“The entire Reg BI package, the policies and procedures, it hasn’t been in (the broker/dealer’s) lexicon. It hasn’t been something they’ve had to think about,” he said. “They’re starting from square one, but as investment advisors, we have all of our squares. We just want to make sure they’re in the right place.”
At Commonwealth Financial Network, each public document is being reviewed by members of the firm to make sure that it is “adequately and accurately articulated” before it is presented for review to the firm’s marketing staff, according to Robert Molinari, the firm’s chief regulatory affairs officer.
“The ‘plain English’ standard is critical if we expect any document to be understood by individuals outside our industry,” he said. “The goal is to provide enough relevant information, in an easy-to-digest style, that the audience can immediately understand the basic concepts while avoiding the legalese and complexity.”
But other firms without the scale of Commonwealth may need to hire outside assistance to make sure their CRS document works in terms of both brevity and substance, and that will be a cost, said Pouliot, though the benefit of having different perspectives on the language will help.
But even if they get the balance right, Pouliot cautioned that there may be an unexpected consequence—once a compliance document is easy to understand, it could have the unintended effect of raising more questions than it answers.
“Plain English gets more people confused because they actually read it,” he said.