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Planning for Form CRS

The form’s rules create several challenges. Don’t delay working on it.

Financial services regulation doesn’t lack for the occasional drama.

In early June the Securities and Exchange Commission (SEC) adopted Regulation Best Interest (“Reg BI”), the Form CRS Relationship Summary and several interpretations relating to the Investment Advisers Act of 1940. Just as the industry was digesting these pronouncements, in late June the U.S. House of Representatives passed an appropriations bill with an amendment that effectively blocked the SEC’s ability to spend funds on Reg BI’s implementation, administration, enforcement or publicity.

The House bill is unlikely to get past the Senate or the president, so the prudent course for advisors is to assume that Reg BI and Form CRS will take effect June 30, 2020. But while Reg BI has been getting much of the media attention, it would be risky to delay work on Form CRS, because the form’s rules create several challenges.

Detailed Guidance With Constraints

The SEC has provided detailed guidance on Form CRS: the form’s PDF file runs over 500 pages. The agency, thankfully, also provides completed forms for use as templates.

Sara Crovitz, a partner with Stradley Ronon, notes that the final Form CRS generally requires the same type of information as its previously proposed version. She cites a prescribed list of topics in a particular order that require information about: (1) the firm and a link to the SEC’s website (where there will be investor education materials); (2) the types of client and customer relationships and services each firm offers; (3) the fees, costs, conflicts of interest and required standard of conduct associated with those relationships and services; (4) whether the firm and its financial professionals currently have reportable legal or disciplinary history; and (5) how to obtain additional information about the firm.

The SEC also has imposed constraints on the document’s format, language and length. Length is limited to two pages; dual registrants have a four-page limit. Crovitz explains that in those two or four pages, firms must respond to the required topics, but they also have flexibility generally to use their own wording and to create a more reader-friendly format. In addition, the document can take a layered approach with hyperlinks to additional information and use of graphics to help retail investors understand the information.

Managing Layers

The instructions for Form CRS give guidance on the layering concept. Per the instructions, if the relationship summary is posted to the firm’s website or otherwise provided electronically, the advisor must use hyperlinks for any referenced documents that are available online. The advisor may use links in the form to supplement required disclosures such as “fee schedules, conflict disclosures, the firm’s narrative brochure required by Part 2A of Form ADV, or other regulatory disclosures.”

This is a different approach from documents like Form ADV, says Jim Lundy, partner with Drinker Biddle. Although the guidance for Form ADV allows reference to other documents, Form CRS encourages the use of linked references, thus creating a layered approach to disclosure. Using links can create additional compliance and supervisory challenges, however, Lundy cautions. Firms that embed links must be mindful that every time a link is updated, it remains consistent with their obligations pursuant to the new Form CRS requirement. “I think what some more sophisticated firms may do is create their own links to link into the form, like here is a general description of our standard of conduct obligation; for more information please see this,” he says.

Avoiding Potential Problems

Some advisors might view Form CRS as an opportunity to promote their services, but Lundy cautions that firms viewing the form as a marketing document will do so at their own peril. He cites the Form ADV brochure concept as an example. When that format appeared, there was a thought that it would be a client-friendly and perhaps a firm-friendly document—the term “brochure” was and still is used. Fast-forward to 2018, and the self-reporting initiative regarding share class disclosures made it very clear that the brochure and those disclosures are not marketing documents; they are legal disclosure documents with certain requirements. “If those requirements aren’t followed, they can form the basis for being charged by the SEC enforcement division,” he adds.

Lundy advises getting an early start on completing Form CRS. “It’s in the future but when you look to that future and you work backward, what we’re telling clients is let’s get to work now,” he says. “Let’s get to the right point by the effective date so you’re not behind the curve and you don’t put yourself unknowingly on a path that exposes you for those types of findings or a potential enforcement investigation.”

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