Drafting Tips for ADV Part 3/Form CRS

May 20, 2020

In June 2019, the U.S. Securities and Exchange Commission (“SEC”) adopted a new rule requiring SEC registered investment adviser firms to prepare and deliver an easily accessible and understandable Consumer Relationship Summary, also known as the Form CRS or Form ADV Part 3, to retail investor clients.

An SEC registered investment adviser’s initial Form CRS/Form ADV Part 3 must be filed with the SEC by June 30, 2020 and delivered to existing clients no later than July 30, 2020. This quickly approaching deadline means investment adviser firms must act now to ensure compliance with the rule. Click here to read our recent blog on the SEC’s decision to maintain the original June 30, 2020 filing deadline despite the impact of COVID-19. State registered investment advisers, which are registered with the Oklahoma Department of Securities, are also required to prepare and file the Form ADV Part 3; please click here to read more about Oklahoma’s specific requirements.

Form ADV Part 3 Drafting Tips

U.S. Securities and Exchange Commission (“SEC”) Building – Washington DC, USA

This is the third blog in our three-part series: “Drafting Tips for Form ADV Part 3.” To read Part 1 – “Preparing to Draft Your Form ADV Part 3”, click here. To read Part 2 – “Drafting the Content of Your Form ADV Part 3”, click here.

Drafting Tips for SEC Investment Adviser Firms

One of the SEC’s primary goals in developing the Form ADV Part 3 is to ensure that retail investors understand their investment adviser’s fees, services, and conflicts of interest. Because the SEC’s definition of “retail investor” does not reference net worth or financial sophistication, investment advisers must ensure the Form ADV Part 3 is understandable by each type of retail investor they serve. The format of the Form ADV Part 3 is integral to making the disclosures accessible and understandable to all of the investment adviser’s retail investors.

Writing Style

  • Use short sentences and paragraphs.
  • Use definite, concrete, everyday words.
  • Use active voice.
  • Avoid legal jargon or highly technical business terms unless strictly necessary. The investment adviser must clearly explain any such terms, if used, and these explanations will take up valuable space in the disclosure.
  • Avoid multiple negatives.
  • Write the response to each item as if the investment adviser firm is speaking to the retail investor, using “you,” “us,” “our firm,” etc.
  • Provide factual and balanced descriptions to help retail investors evaluate the investment adviser firm’s services.
  • Avoid any exaggerated or unsubstantiated claims, vague and imprecise “boilerplate” explanations, or disproportionate emphasis on possible investments or activities that are not offered to retail investors.

Technical Considerations

  • If provided electronically to retail investors or posted to the investment adviser firm’s website, the investment adviser firm must provide a way to access referenced materials (such as references to the investment adviser’s Form ADV Part 2A) in the Form CRS/Form ADV Part 3 relationship summary using a hyperlink.
  • The investment adviser should consider whether all linked materials are readily available online. For example, the firm should investigate whether its Form ADV Part 2A is already posted to the investment adviser’s public website and who is (or will be) designated to keep these materials up to date.
  • Keep in mind, the electronic version of the Form CRS/Form ADV Part 3 filed with the SEC must be in a text searchable format with machine readable headings. A non-searchable pdf will not be adequate. The SEC provides an example of one method to create machine readable headings in its FAQs here.
  • If provided to retail investors in paper format, the Form CRS/Form ADV, Part 3 relationship summary must include URL address or QR code or other means for retail investors to easily access information referenced in Form CRS/Form ADV.

Consult with your IT professional as soon as possible if you need assistance creating the required technical format.

Other Resources

For help determining whether your investment adviser firm is required to deliver a Form ADV Part 3/Form CRS or for more information on the Form ADV Part 3/Client Relationship Summary, you can review the SEC’s Form ADV Part 3 instructions here or visit our Form ADV Part 3 FAQs website page here. You can also watch RCC’s recent complimentary compliance training webinar detailing the Form ADV Part 3/Form CRS by clicking here. The complimentary webinar slides are available here.

Contact Us

If your investment adviser firm is an existing client of RIA Compliance Consultants and has questions about the Form ADV Part 3/ Form CRS Relationship Summary, we encourage you to speak with your compliance consultant. Or, if you are not an existing client of RIA Compliance Consultants, click here to set up an introductory call with our Business Development Team.

To purchase our Form ADV Part 3 Drafting & Filing Service, please click here. Additionally, RIA Compliance Consultants has prepared a sample compliance manual section regarding the preparing, filing, delivery and updating of the Form ADV Part 3, which is available on complimentary basis for our Bronze, Silver, Gold and Platinum clients via their online subscription account or can be purchased on a la carte basis at https://riacompliance.infusionsoft.app/app/storeFront/showProductDetail?productId=976.

Posted by Grant Parr
Labels: ADV Part 3, Oklahoma Investment Advisor, SEC