The Securities and Exchange Commission settled charges with a New York-based registered investment advisory firm this week for failing to file and deliver its Form Customer Relationship Summary to the regulator and its clients on time.
The order follows previous SEC charges this past July against more than two dozen firms for similar conduct, with one securities attorney saying enforcement staff will likely continue identifying firms that had not filed, calling it the “lowest-hanging fruit” of CRS violations.
According to the SEC, Syracuse, N.Y.-based Disciplined Capital Management, with about $391 million in assets under management failed to comply with the deadline for their Form CRS to be filed with the SEC by June 30, 2020, and failed to deliver the form to existing clients by a second deadline in July 2020.
In the order, the commission argued that the SEC’s exam staff contacted the firm’s CCO on Oct. 14, 2020 to alert the firm it had not filed a Form CRS. But according to the commission, Disciplined still failed to file it, and did not do so until March 30, 2021. Additionally, the firm didn’t deliver the form to existing retail clients and did not post the form on its website until March, according to the SEC. Disciplined, while it didn’t admit or deny the findings in the order, agreed to a cease-and-desist, a censure and to pay $25,000. Representatives from the firm did not return calls for comment as of press time.
In July, the SEC charged 21 investment advisors and six broker/dealers with failing to “timely file and deliver” their Form CRS to investors. The charges were announced on Gurbir S. Grewal’s first day as the SEC’s Enforcement Director, and the penalties ranged from $10,000 to more than $97,000.
Kurt Wolfe, an attorney in the SEC Enforcement Practice at the law firm Quinn Emanuel Urquhart & Sullivan, said it was difficult to estimate how frequent these kinds of actions would be, but stressed it was comparatively simple for SEC examiners and enforcers to surmise if a firm lapsed in filing a Form CRS. Wolfe is waiting for the SEC to start enforcing the substance of the Form CRS, which he expected would begin with obvious cases, like failures to disclose conflicts, or failing to adequately describe a conflict or fees. Wolfe argued that these were the kinds of issues the form was supposed to clearly elucidate for clients.
“If they feel you’re not doing that right, or well enough, or certainly if you’re not being truthful, those are the kinds of cases that you may see if and when we get to enforcement actions that are keying in on the substance of the disclosures in Form CRS,” Wolfe said.
Wolfe also was eyeing if and when we’d see the first enforcement actions related to Regulation Best Interest, which was passed and implemented at the same time as the Form CRS mandates. Wolfe said the SEC had shown a “decent amount” of interest in the rule and how it would be applied and enforced (noting Grewal had spoken about it in his first speech as enforcement director). He also expected the first moves would come from the commission, and not from other entities like the Financial Industry Regulatory Authority.
“It’ll be interesting to see if and when we bring those cases, and I think it will be the SEC that brings those cases,” Wolfe said.