On October 26, 2020, the United States Securities and Exchange Commission (“SEC”) hosted an online roundtable discussion on Regulation Best Interest and Form CRS, with contributions from senior staff at the SEC and the Financial Industry Regulatory Authority (“FINRA”). Divided into two panels, the online roundtable focused on issues and observations made by SEC and FINRA staff (referred to collectively here as “the staff”) regarding Regulation Best Interest and Form CRS. To view the archived webcast, click here.
Regulation Best Interest – Issues and Observations
– The staff has observed cases where Reg BI/Form CRS policies and procedures are not memorialized or are memorialized too vaguely. In some cases, the staff has noticed a lack of controls around compliance testing procedures, including a lack of specificity about who is responsible for a given compliance function.
– The staff noted that SEC registered investment adviser and broker dealer firms must conduct training for their supervised persons on Reg BI and Form CRS compliance. Training should teach attendees how to comply, rather than simply recite what the new obligations are.
– The staff recommended utilizing online training as needed due to COVID-19 based difficulties/restrictions. The staff observed that some firms are requiring post training tests for attendees or fining representatives for not completing training on time, which may help increase compliance. Absent, late and/or inadequate training are problematic. SEC staff noted that, in cases where training was not timely, staff will look to see if any violations occurred during the interim period.
Form CRS – Issues and Observations
– Regulators continue to look for inconsistencies between disclosure documents, such as the Form CRS and Form ADV and Form U4. In addition, SEC registered investment adviser firms should periodically confirm that all such disclosure documents are consistent with actual practices and other firm documents, such as compliance policies and procedures and client agreements.
– The staff noted that some firms have improperly included additional disclosures or explanations in the Form CRS. The Form CRS should only include disclosures and statements that are explicitly required and permitted by the Form CRS Instructions.
– The staff noted some instances where firms appeared to draft Form CRS in line with the proposed rule materials. Firms should follow the final Form CRS instructions, which differ from the proposed instructions.
– If an investment adviser or broker dealer firm is using a single Form CRS for multiple affiliates, the Form CRS must clearly explain the affiliate relationships and clarify which statements in the disclosure are applicable to which affiliate.
– Staff noted that some SEC registered investment adviser firms stated in the Form CRS that they are “fiduciaries”, which is neither required nor permitted by the Form CRS Instructions.
– The Form CRS should be formatted in such a way to be easily read and accessible to retail investors. Staff noted the following tips:
– Make sure to use plain language. Staff noted that among Form CRS they have reviewed, most are at an average reading grade level of about 11th grade. Firms should aim for 8th grade reading level.
- Avoid boilerplate language.
- Make sure all hyperlinks are accurate. Firms should establish a reasonable timeline based on their business practices and designate an individual to periodically check that links are not broken.
- Make good use of white space, graphics, and other tech features to make the Form CRS easy to read and to help retail investors access supplementary information not included in the Form CRS.
- Avoid marketing language, including superlatives or descriptive language.
RIA Compliance Consultants has developed a Form ADV Part 3 Comprehensive Compliance Package which includes the drafting and filing of your Form CRS/Form ADV Part 3 by one of our Senior Compliance Consultants, our Form ADV Part 3 Compliance Manual Update Section, our Form ADV Part 3 Compliance Review Tool Module, and Form ADV Part 3 Training materials, available here. Also available a la carte are several Form ADV Part 3 sample compliance form and training materials, including the Sample WSP/CoE Section: Form ADV Part 3, Form ADV Part 3 – Compliance Review Module, Form ADV – Part 3 – Conversation Starters Script, and Form ADV – Part 3 – Cover Letters for Relationship Summary.
If your investment adviser firm is an existing client of RIA Compliance Consultants and would like assistance reviewing its disciplinary disclosures, developing customized policies and procedures, and/or implementing compliance testing for 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.
Form CRS/Form ADV Part 3 Testing for Compliance – June 18, 2020