In 2019, the U.S. Securities and Exchange Commission (SEC) published numerous final and proposed rules impacting investment advisors and broker-dealers, which will become effective in 2020. The adoption of Form CRS and related rules and amendments under both the Investment Advisers Act of 1940 (Advisers Act) and the Securities Exchange Act of 1934 (Exchange Act) are included in the rules to become effective in 2020.
By June 30, 2020, both SEC-registered investment advisors and broker-dealers are required to deliver to each of their retail investors a Form CRS relationship summary, which must also be filed with the SEC beginning on May 1, 2020, and no later than June 30, 2020. The purpose of the relationship summary is to provide customers or clients with information about the investment advisor firm or broker-dealer firm. For dual registrants, i.e., firms that are registered as a broker-dealer under Section 15 of the Exchange Act and as an investment advisor under Section 203 of the Advisers Act and offer services to retail investors as both a broker-dealer and an investment advisor, the SEC encourages but does not require a single relationship summary discussing both the brokerage and investment advisory services; dual registrants may prepare two separate relationship summaries, one for its brokerage services and another for its investment advisory services.
According to the SEC, “[t]he relationship summary is designed to assist retail investors with the process of deciding whether to (i) establish an investment advisory or brokerage relationship, (ii) engage a particular firm or financial professional, or (iii) terminate or switch a relationship or specific service.” Before providing and filing the relationship summary, investment advisors should be familiar with Form CRS, which is available here. Form CRS contains the following items, or standardized headings, which should be included in the relationship summary: Item 1. Introduction; Item 2. Relationship and Services; Item 3. Fees, Costs, Conflicts, and Standard of Conduct; Item 4. Disciplinary History; and Item 5. Additional Information.
In addition to the required content, Form CRS has certain formatting requirements. While the instructions of Form CRS provide detailed formatting requirements, the SEC has highlighted three areas for drafters to keep in mind. First, Form CRS must be drafted in compliance with the SEC’s “plain English” standards; however, the drafter should take into account the retail investor’s level of experience. Second, for investment advisors and broker-dealers, the relationship summary should not exceed two pages and for dual registrants, the relationship summary should not exceed four pages. Third, relationship summaries that are posted to a firm’s website or provided electronically have additional requirements that are outlined in the instructions of Form CRS.
Michael Best’s Securities & Capital Markets team has experts who advise investment advisors and broker-dealers on compliance with SEC rules and regulations, including compliance with Form CRS. Please do not hesitate to contact the authors of this article or your Michael Best attorney for additional guidance and information.