Under certain circumstances, an investment adviser firm registered with the U.S. Securities and Exchange (“SEC”) is not required to file/deliver the new Form ADV Part 3/CRS relationship summary.
On June 5, 2019 the SEC approved a new rule requiring investment adviser firms to provide retail investment clients with a Consumer Relationship Summary, also known as the Form CRS or Form ADV Part 3 relationship summary. The requirements of the Form CRS/Form ADV Part 3 relationship summary apply to all investment advisers registered or applying for registration with the SEC. In practice, however, not all SEC registered investment advisers will need to file/deliver a Form ADV Part 3 relationship summary under the new rule depending upon the circumstances.
Investment advisers are required to deliver the Form ADV Part 3 relationship summary to clients and prospective clients who are “retail investors”. “Retail investor” is defined as “a natural person, or the legal representative of such natural person, who seeks to receive or receives services primarily for personal, family or household purposes.” An SEC registered investment adviser is not required to deliver the Form ADV Part 3 relationship summary to any clients that do not meet this definition. In the event an SEC registered investment adviser does not have any retail investor clients, it is not required to file or deliver the Form ADV Part 3 relationship summary.
The requirements of the Form CRS/Form ADV Part 3 relationship summary do not apply to exempt reporting advisers filing with the SEC.
Common Situations Where Delivery Is Not Required
- Current Retail Investors Clients Making Specified, Limited Changes to Accounts. Although an investment adviser must generally deliver the Form ADV Part 3 relationship summary when a current retail investor seeks new services, the SEC has identified one limited circumstance under which re-delivery is not required. Namely, a request by a client to add a new account owner, without any further changes or additions to the account agreement, does not require delivery of the Form ADV Part 3. The investment adviser must still comply with all other filing and delivery requirements of the rule.
- Clients Which Are Pooled Investment Vehicles Or Other Investment Advisers. Entities that service retail investors (such as other investment adviser firms) or that contain retail investors (e.g., pooled investment vehicles) are not required to receive the Form ADV Part 3 relationship summary, so long as the entity itself does not meet the definition of retail investor. Click here for the SEC’s FAQ on Form CRS/Form ADV Part 3.
- Clients Which Are Professional Legal Representatives. The SEC has distinguished between “professional legal representatives” and “non-professional legal representatives” under the rule, and only requires delivery of the Form ADV Part 3 relationship summary to non-professional legal representatives, such as executors, conservators, and persons holding a power of attorney for a natural person. Regulated financial services professionals, including registered investment advisers and broker-dealers, corporate fiduciaries (e.g., banks, trust companies and similar financial institutions) and insurance companies, and the employees or other representatives of such regulated professionals would not meet the definition of a “non-professional legal representative” and consequently need not receive the Form ADV Part 3 relationship summary. See https://www.sec.gov/rules/final/2019/34-86032.pdf at page 195.
- Clients Which Are Retirement Plans and Retirement Plan Representatives. As with professional legal representatives, a retirement plan and the retirement plan representative are not considered a “retail investor” for purposes of the Form CRS/Form ADV Part 3 relationship summary. See page 200 -201 at https://www.sec.gov/rules/final/2019/34-86032.pdf . However, in the event a plan representative is a sole proprietor or other self-employed individual who will participate in the plan, the plan representative would be considered a retail investor seeking services for personal, family or household purposes and must receive a copy of the Form ADV Part 3 relationship summary. See page 201 at https://www.sec.gov/rules/final/2019/34-86032.pdf.
An SEC registered investment adviser’s initial Form CRS/Form ADV Part 3 relationship summary must be filed via IARD by June 30, 2020 and delivered to existing clients no later than July 30, 2020. With this fast approaching deadline, investment advisers must act now to ensure the Form ADV Part 3 is timely filed and delivered. State registered investment advisers that are registered with the Oklahoma Department of Securities or the Rhode Island Securities Division are also now required to prepare and file the Form ADV Part 3; please click here to read more about Oklahoma’s specific requirements and here to read about Rhode Island’s specific requirements.
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. Click here to read OCIE’s Risk Alert for Form CRS Compliance. 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.
To read our three part blog on Drafting Tips for the Form CRS/Form ADV Part 3, click here for Part 1 – “Preparing to Draft Your Form ADV Part 3”. To read Part 2 – “Drafting the Content of Your Form ADV Part 3”, click here. To read Part 3 – “Style and Technical Considerations”, click here.
If your investment adviser firm is an existing client of RIA Compliance Consultants and would like assistance developing customized policies and procedures and/or IAR training regarding filing and delivery of the Form CRS/Form ADV Part 3, 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.
Posted by Bryan Hill