On June 15th, 2020, the United States Securities and Exchange Commission (“SEC”) announced a new website designed for Main Street Investors, intended to help retail investors navigate the new Form CRS/Form ADV Part 3. Published in a “Question and Answer” format, the website explains to retail investors the purpose of the Form CRS/Form ADV Part 3 and describes the information they can expect to find in the Form CRS/Form ADV Part 3. Click here to view the SEC’s new website for Main Street Investors. As an SEC registered investment adviser firm prepares its Form CRS/Form ADV Part 3 training for its supervised persons, RIA Compliance Consultants recommends that a review of the Main Street Investors website should be included as a component of such compliance training.
In conjunction with announcing the new website for Main Street Investors, Jay Clayton, the current Chairman of the SEC, issued a public statement confirming the June 30th, 2020 compliance date for Form CRS/Form ADV Part 3. Clayton noted that investment adviser and broker dealer firms have already made substantial progress in adjusting their business practices, modifying their policies and procedures and otherwise preparing for the requirements of Reg BI (for broker-dealers) and the obligation to file Form CRS (for broker dealers and registered investment advisers) by the June 30th, 2020 compliance date. SEC Chairman Clayton further reaffirmed his view that the risks and volatility resulting from COVID-19 “weigh substantially in favor” of implementing the new requirements without delay.
Areas Where Increased Care May be Necessary When Making Recommendations to Main Street Investors
Although the public statement mainly addresses Reg BI and broker dealers, SEC Chairman Jay Clayton also highlighted several areas where SEC registered investment adviser firms should take special care to make fiduciary recommendations, in light of COVID-19 and current market volatility. Clayton notes that Main Street Investors may currently have increased need for cash and liquidity due to market volatility and employment impacts, and may be more vulnerable to complex, risky, or otherwise inappropriate recommendations.
SEC registered investment advisers, and particularly those who provide ongoing monitoring as part of their advisory services, should take an opportunity to touch base with their investment advisory clients and ensure current advisory recommendations continue to be in the client’s best interest in light of possible changes to the client’s investment objectives and investment profile due to COVID-19.
In addition to any regular or periodic review, Clayton cautioned that SEC registered investment advisers should take special care with recommendations in the following four areas.
- Rollovers and withdrawals from 401(k) and other plans.
- The recent Coronavirus Aid, Relief and Economic Security (“CARES”) Act allows eligible participants in certain tax-advantaged retirement plans to take early distributions subject to certain conditions. Recommendations to rollover or make withdrawals must be carefully navigated to ensure that the statutory conditions are met and that the recommendation made is best for the client, and not merely to benefit the investment adviser (e.g., by increasing the client’s billable assets under management at the firm). To see the SEC’s recent Investor Bulletin on the CARES Act, click here.
- Complex or risky products.
- SEC registered investment advisers should review recommendations made to retail investors regarding complex or risky products, such as leveraged products or products in illiquid and volatile markets, to ensure such recommendations are in the retail investor’s best interest in light of current circumstances.
- COVID-related investments.
- Over the last several months, a number of companies have announced products and services intended to address and mitigate the effects of COVID-19. While some are legitimate, others have been alleged to be associated with pump and dump schemes or risky penny stocks. Investment advisers must carefully vet any COVID-related recommendations to ensure they are legitimate opportunities and are only offered to retail investors who have an appropriate risk tolerance in light of the potential benefits. To view the SEC’s Investor Alert on COVID-related frauds, click here.
- SPACs and Other Structured Investment Vehicles.
- A special purpose acquisition corporation (“SPAC”) is an investment vehicle through which the sponsor of the SPAC raises funds from investors, which the sponsor subsequently uses to identify and acquire another company. If no acquisition is made during a predetermined time period, investors typically receive some or all of their money back. While investing in a SPAC may be an appropriate recommendation for some retail investors, Clayton cautioned that the money back feature may cause retail investors to believe that the investment is less risky than it truly is. SPACs pose complex risks and potential conflicts of interest due to compensation structure, and should only be recommended when special care is taken to ensure the recommendation is in the client’s best interest.
For SEC registered investment adviser firms with retail investors, RIA Compliance Consultants is hosting a webinar, “Compliance with Form ADV Part 3 Requirements,” on Wednesday, June 24, 2020. During this online compliance training event, we will discuss the initial delivery requirements to existing clients, the use of electronic delivery, the requirement to post to the website and hyperlinking to Form ADV Part 2A, the obligations to update, file and deliver after material changes and SEC examination issues. Click here to purchase your seat to this webinar.
If your investment adviser firm is an existing client of RIA Compliance Consultants and would like assistance in preparing/filing the Form CRS/Form ADV Part 3 relationship summary by June 30, 2020 or developing customized policies and procedures and/or IAR training regarding filing, updating and delivery of the Form CRS/Form ADV Part 3 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.