Locke Lord QuickStudy: New Form CRS: What You Need to Know to Prepare For the June 30, 2020 Compliance Date

On Wednesday, June 5, 2019, the Securities and Exchange Commission (the “SEC”) voted to adopt requirements for investment advisers and broker-dealers to prepare and file a Form CRS Relationship Summary. The Form CRS Relationship Summary (“Form CRS”) requires registered investment advisers and registered broker-dealers to provide retail investors with simple, easy-to-understand summary information about the nature of their relationship with their investment adviser or broker-dealer. The SEC has indicated that the goal of Form CRS is to provide this summary information in a standard way which allows retail investors to more easily compare investment advisers and broker-dealers. In addition to the summary information, Form CRS will also include a link to a dedicated page on the SEC’s investor education website which offers educational information about broker-dealers and investment advisers, and other materials. In the end, we view this form as primarily intended to make explicit whether a client is dealing with an investment adviser or a broker-dealer and what difference that may make to the client when choosing between or among investment advisers and broker-dealers.

Form CRS will be filed online and retail investors will receive a Form CRS at the beginning of their relationship with their investment adviser or broker-dealer. For investment advisers, the Form CRS will be included as Part 3 of their Form ADV.

The new rule is codified at 17 CFR 275.204-5 under the Investment Advisers Act of 1940 and 17 CFR 240.17a-4 under the Securities Exchange Act of 1934.

Compliance with new Form CRS

Retail Investors
The adopting release defines a “retail investor” as “a natural person, or the legal representative of such a natural person, who seeks to receive or receives services primarily for personal, family or household purposes”. This definition excludes natural persons seeking investment services for commercial or business purposes; however, if a person is seeking services for a mix of personal and non-personal purposes, the Form CRS must be delivered to such person. We note that this definition of “retail investors” does not differentiate between natural persons based on net worth or other criteria, and as such any natural person seeking to receive services for personal, family, or household purposes would be deemed to be a “retail investor.”

Format
The new rule mandates that the length of Form CRS for broker-dealers and investment advisers may not exceed four pages. It is intended that the Form CRS will be presented in a manner that is easily accessible to retail investors. As such, the Form CRS must be drafted in compliance with the SEC’s “plain English” standards.

Content
Form CRS is intended to provide a summary of the investment adviser’s or broker-dealer’s business. The following items must be included in the following order in the firm’s Form CRS:

Item 1: Introduction

This item provides the registration status and basic information about the investment adviser or broker-dealer.

Item 2: Relationships and Services

This item describes the investment adviser’s or broker-dealer’s types of client and customer relationships and services the firm offers.

Item 3: Fees Costs, Conflicts and Standards of Conduct

This item describes the fees, costs, conflicts of interest, and required standard of conduct associated with the relationships and services offered by the investment adviser or broker-dealer.

Item 4: Disciplinary History

This item discloses whether the firm and its financial professionals currently have reportable legal or disciplinary history. Note that for investment advisers, this may be repetitive of information in the Form ADV Part 2A and B.

Item 5: Additional Information

This item explains how a client can obtain additional information about the firm.

Initial Filing of Form CRS:

Investment Advisors. For investment advisers, Form ADV, Part 3 (Form CRS) must be filed electronically with the Investment Adviser Registration Depository (IARD).

Investment advisers who are already registered or have an application for registration pending with the SEC before June 30, 2020 must electronically file the Form CRS beginning on May 1, 2020 and by no later than June 30, 2020 either as: (1) an other than-annual amendment or (2) part of the initial application or annual updating amendment. After June 30, 2020, the Commission will not accept any initial application that does not include a Form CRS.

Broker-Dealers. Broker-dealers will File Form CRS electronically through the Central Registration Depository (“Web CRD”).

Broker-dealers who are already registered with the SEC as a broker-dealer before June 30, 2020 must electronically file the Form CRS beginning on May 1, 2020 and by no later than June 30, 2020. Broker-dealers who have filed an application for registration or have an application pending with the SEC as a broker-dealer on or after June 30, 2020 must file Form CRS by no later than the date that registration becomes effective.
 
Dual Registrants. Dual registrants will file Form CRS using both IARD and Web CRD.

Initial Delivery of Form CRS to clients:

Delivery to New and Prospective Clients. Investment advisers must deliver a Form CRS to each retail investor before or at the time the investment adviser enters into an investment advisory contract with the retail investor, even if agreement with the retail investor is oral. Broker-dealers must deliver a relationship summary to each retail investor, before or at the earliest of: (i) a recommendation of an account type, a securities transaction, or an investment strategy involving securities; (ii) placing an order for the retail investor; or (iii) the opening of a brokerage account for the retail investor.

For new and perspective retail clients, as soon as an investment adviser or broker-dealer has filed the Form CRS online, delivery to retail investors must begin.

Delivery to Existing Clients. Investment advisers and broker-dealers must deliver a Form CRS to existing clients within 30 days from the date an investment adviser or broker-dealer has filed the Form CRS online.

Timeline:

Form CRS will become effective 60 days after it is published in the Federal Register, and the date by which investment advisers and broker-dealers must comply is June 30, 2020.

The full text of the SEC’s release regarding the Form CRS can be found here.