Last week, the Securities and Exchange Commission released additional guidance to help advisors prepare Regulation Best Interest’s implementation in the form of responses to a number of frequently asked questions. One of these questions was whether including a hyperlink to disclosures mandated by Reg BI on a firm’s Form Client Relationship Summary (CRS) would satisfy the requirement to deliver those disclosures to new or potential customers; not necessarily, the SEC responded, noting that both Reg BI and Form CRS have “distinct disclosure delivery obligations.”
The suggested use of hyperlinks underscores one of the significant challenges firms face as they create a Form CRS to be delivered to clients, according to GJ King, the CEO of RIA in a Box. The SEC has demanded that firms confine the length of their forms to only two pages (or four pages for dual registrants) but firms must weigh this brevity against the amount and type of information they feel must be included.
“I think the danger from Form CRS is that it catches you by surprise in the sense that it’s a two-page disclosure document. You think, ‘oh, it can’t be that bad,’ but the nuance is a bit more challenging,” King said in an interview with WealthManagement.com. “The official rule related to Form CRS is 564 pages to describe a two-page document. So, it’s challenging, right?”
On the same day that SEC commissioners voted to approve Regulation Best Interest in June 2019, the commission also voted to require registered investment advisors and broker/dealers to complete a Form CRS, a "customer relationship summary" intended to provide retail investors with a short, clear description of the relationship between an advisor and client, in plain, concise language.
Yet according to the SEC, each firm’s two-page form must include disclosures concerning relationships, services, fees, costs, conflicts, a standard of conduct, disciplinary history and relevant "additional information."
Brokers and advisors must submit a version of their Form CRS to the SEC by June 30 (the date Reg BI takes effect), and must supply existing clients with either an electronic or paper copy, or both, of the form within 30 days of that date (firms will have to supply prospective clients after that date with a copy of the form, as well).
The information that must be included (along with some mandatory standardized language about the firms’ conduct) on two pages leaves firms little room to work with, King said. In the release of the rule, the SEC suggested that firms use a “layered disclosure,” which could include hyperlinks or other means for clients to get to supplemental information that could not be included on the Form CRS due to the limited space. But hyperlinking away to lengthier material leads to concerns that disclosures that must be made won't be found in the two-page document, obviating the purpose of the form in the first place. Advisors who are trying to be compliant can find themselves in unmapped territory.
“They recognize it’s hard to do everything in two pages, so when you need to add some other documents, there’s an elegance to crafting it,” King said.
Commonwealth Financial Network (which will have four pages of space as it is a dual registrant) “will be relying on a lot of links,” according to Paul Tolley, a senior vice president and chief compliance officer for the firm. To prepare Commonwealth’s Form CRS for delivery, Tolley and his team have completed multiple drafts, paring down the wordiness to find any possible additional space. Thus far, Tolley has found the “layered disclosure” approach to be beneficial.
“Our approach is to speak at a high level and there’s a lot of referrals to where they can find additional information,” he said. “You can use that layered approach with the format of Form CRS; firms within that have the flexibility to approach it however they want.”
But using “layered disclosure” to include the necessary content on Form CRS, while complying with the two-page constraint, creates its own challenges, particularly for compliance officers like Wendy Lanton, the chief compliance officer at Lantern Wealth, a brokerage firm based in Melville, N.Y.
Lanton has taken the lead on crafting the firm’s Form CRS (while the firm is a dual registrant, it will be supplying separate forms to its advisory and brokerage clients).
“If I can get the information on my CRS and do it in as brief and concise a way as possible, the only way to do that is to have separate documents that offer disclosure,” she said, noting her fear about additional disclosures “is that clients will be reading a novel.”
During a recent FINRA panel discussion, Meredith Cordisco, an associate general counsel for FINRA’s Office of General Counsel, noted that while firms are being encouraged to use interactive tools in their relationship summaries (including pop-up boxes, chat functionalities, or fee calculators), many consumers still prefer paper copies of any documentation from their advisor and haven’t consented to receiving notices electronically.
When asked how these interactive tools can be translated to the paper version, Alicia Goldin, a senior special counsel at the Office of Chief Counsel for the SEC Division of Trading and Markets, said that a paper version would need to meet all of the rule’s requirements, even if an electronic version incorporated different kinds of tools to better relay supplemental information, but noted the “conversation starters” that are to be included on the form were meant to spur questions and answers between brokers and clients.
During the discussion, Lanton said that about 19% of Lantern’s customers currently have information delivered electronically, which can pose difficulties in Form CRS design. She said she was still trying to finalize the CRS paper design, but she presumed she would have to create a disclosure document that would be separately referenced and could be mailed on request.
“What I’d like to do is eventually create a QR code, but the reality is someone who takes a paper document isn’t likely someone who has the tech ability to scan a bar code,” she said. “There’s so much additional disclosure, from the firm’s perspective, that we’re afraid to leave anything out. And those supplements? Those can be a lot of pages.”
After the mass delivery for all existing clients that must occur in the month following June 30, a firm’s Form CRS must only be sent to all its retail clients when the document is updated, and must be supplied to an individual existing client only if a new recommendation is made or account opened. Those like King believe this means the most arduous part of the Form CRS will be creating it.
“For better or worse, it’s going to be much more burdensome to create this Form CRS,” King said. “This will be a heavy lift, but going forward it’s going to be much easier.”