On December 17, 2021, the staff of the U.S. Securities and Exchange Commission (“SEC”) issued a statement on Form CRS disclosures ( “Form CRS””). In the statement, the SEC provided helpful guidance to investment advisers and broker-dealers that are required to deliver Form CRS to their retail investors. Note that the SEC defined a “retail investor” as a natural person, or legal representative of natural person, who seeks to receive advisory or brokerage services primarily for personal, family or household purposes. Thus, the Form CRS requirements would not apply to an investment manager that solely manages private funds or corporate clients.
What is Form CRS?
In June of 2019, the SEC introduced Form CRS to help retail investors make informed choices regarding what type of relationship—brokerage, investment advisory, or a combination of both—best suits their particular circumstances and investment objectives. Form CRS topics include information about services, relationship fees, standards of conduct and disciplinary history.
All SEC registered broker-dealers and investment advisers that provide services to retail investors must file a Form CRS with the SEC and provide a copy to prospective and existing clients.
How does the Form CRS benefit retail investors?
Instead of sorting through technical and often confusing disclosure documents, retail investors now have access to brief and easy to understand relationship summaries. Form CRS also makes it easier for retail investors to compare investment advisors, as each Form CRS address the same topics in a standard format.
Things to be mindful of when drafting a Form CRS
Covered investment advisers and broker-dealers should understand that the policy intent of Form CRS is to provide clarity to retail investors through brevity and readability. The pointers below are intended to provide guidance to firms as they prepare their Form CRS:
Avoid technical language. Relationship summaries must use language that takes into consideration retail investors’ level of financial experience. It is best for firms to avoid legal jargon and highly technical financial terms unless such language is clearly explained.
Use proper formatting. One of the goals of Form CRS is to provide retail investors with an easy way to compare different firms. This is achieved through prescribed formatting. Firms should ensure that “conversation starters,” formatting, ordering of the text and page limitations are consistent with Form CRS requirements.
Reference more detailed information. The SEC requires layered disclosures, so Form CRS drafters can, and should provide hyperlinks to more detailed documents. This allows firms to summarize information and avoid over-disclosure, while providing retail investors with easy access to more robust documents such as the Form ADV. Note that firms must facilitate access to any referenced outside documents. It is not enough to simply state that retail investors can find more detailed information in the firm’s Form ADV. They must provide a link.
Ensure that everything is contemporary. Service descriptions must be up-to-date and accurate. Any changes to or expansion of a firm’s services must be reflected in Form CRS. This includes listing new conflicts of interest and disciplinary actions against the firm or individuals within the firm.
Posting. It is important for firms to ensure that Form CRS is not only filed with the SEC and delivered to retail investors, but also published in a prominent place on the firm’s website.
If you have any questions about this alert, or any other regulatory matters, do not hesitate to reach out to Daniel Viola (Partner – Head of the Regulatory Group) at 212.573.8038 or via email at dviola@sadis.com, or to Nicole Arrow (Associate) at 212.573.8148 or via email at narrow@sadis.com.
